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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-24872
PHYSICIAN RELIANCE NETWORK, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2495107
- --------------------------------- -------------------
State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5420 LBJ Freeway, Suite 900
Dallas, Texas 75240
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (972) 392-8700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
------------------------------------------------------
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 26, 1997, 48,117,065 shares of Common Stock were
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant as of such date was approximately $167,379,000
(based upon the closing sale price of the Common Stock on The Nasdaq Stock
Market's National Market on March 26, 1997 of $5.25 per share). For purposes of
this calculation, shares held by non-affiliates excludes only those shares
beneficially owned by officers, directors and shareholders beneficially owning
10% or more of the outstanding Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the
Registrant's Annual Meeting of Shareholders to be held on May 21, 1997 are
incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Physician Reliance Network, Inc. (the "Company") provides the
management services, facilities, administrative and technical support, and
ancillary services necessary for physicians to establish and maintain a fully
integrated network of outpatient oncology care. As of December 31, 1996, the
Company had operations in Texas, Iowa, Oregon, Washington, Missouri, Maryland,
Arkansas, New York, Minnesota, and Illinois and provided its services to 290
physicians. The physicians affiliated with the Company provide all aspects of
care related to the diagnosis and outpatient treatment of cancer, including
medical oncology, radiation oncology, gynecological oncology, and diagnostic
radiology.
The Company was incorporated under the laws of the State of Texas in
June 1993. In October 1993, the Company consummated a series of transactions
(the "Reorganization"), resulting in the reorganization of certain limited
partnerships and a corporation affiliated with Texas Oncology, P.A.
(collectively referred to as the "Predecessor Entities"). The Predecessor
Entities had been formed by Texas Oncology, P.A. ("TOPA"), a professional
association then comprised of approximately 61 physicians, and its physicians
and management personnel, to acquire real estate, construct physician offices
and cancer centers, and equip the offices and cancer centers for use by TOPA
physicians in providing services to their patients. In connection with the
Reorganization, the Company and TOPA entered into a service agreement, whereby
the Company provides TOPA with facilities, equipment, non-physician personnel,
and administrative, management, and non-medical advisory services, as well as
services relating to the purchasing and administering of pharmaceuticals and
supplies. For the year ended December 31, 1996, approximately 85% of the
Company's revenues were derived from services provided to TOPA. See "--Service
Agreements."
The Company's principal executive offices are located at 5420 LBJ
Freeway, Suite 900, Dallas, Texas, 75240, and its telephone number at that
address is (972) 392-8700. The Company transacts business directly and
indirectly through its wholly owned subsidiaries, Texas Oncology Pharmacy
Services, Inc. ("TOPS"), PRN-MCD, Inc., PRN Surgery, Inc., and Innovative
Medical Communications, Inc. Unless the context otherwise requires, references
herein to the Company include its subsidiaries.
PHYSICIAN MANAGEMENT SERVICES
The Company's primary business is providing the management services
necessary for the operation of a physician group practice principally engaged
in the diagnosis and treatment of cancer. The services provided by the Company
are concentrated in the following three areas:
FINANCIAL SERVICES. The Company provides the physicians and physician
groups with whom the Company contracts the capital necessary to develop and
equip cancer centers and physician offices and the billing and accounts
receivable management services necessary to deal with complex reimbursement
requirements. The Company also combines the purchasing power of numerous
physicians with respect to medical supplies, equipment, and pharmaceuticals.
CLINICAL SERVICES. The Company provides and manages the facilities
used by physicians. The Company also assists practices in recruiting additional
physicians, provides and trains the nonphysician support staff necessary to
operate the Company's facilities, and provides the technical and ancillary
services required for outpatient treatment of oncology patients.
MANAGEMENT EXPERTISE. As both public and private payors have taken a
more active role in the delivery of health care, the administrative burden on
physicians has increased. The Company provides
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the management expertise necessary to comply with applicable laws and
regulations. The Company also assists in the scheduling of patients, the
purchasing and management of medical supplies and inventories, and the staffing
of multiple health care delivery sites.
CLINIC OPERATIONS
The physicians and physician groups with whom the Company contracts
provide outpatient medical services primarily to cancer patients. Through the
use of the Company's facilities and equipment, physicians can offer a wide
array of services primarily for outpatient cancer treatment, including bone
marrow and stem cell transplantation, mammography, breast imaging, diagnosis,
nuclear medicine, ultrasound, x-ray, laboratory, pharmacy, and patient
education services. Physicians providing services at the Company's facilities
are employed by an affiliated physician group, not the Company, and maintain
full control over their medical practices. The Company is not engaged in the
practice of medicine.
The Company primarily operates two types of facilities: physician
offices and cancer centers.
PHYSICIAN OFFICES. At December 31, 1996, the Company operated 65
physician offices located in 37 cities in ten states. The physician's office is
where a patient interacts most frequently with an oncologist. A typical
physician's office is staffed with two medical oncologists and nine support
personnel. The support personnel include nurses, lab and radiology technicians,
and patient service coordinators. Physician offices also contain the equipment
necessary to administer single agent chemotherapy. By contrast, multi-agent and
multi-modality chemotherapies are generally performed in the Company's cancer
centers. Additional services which may be offered at a physician's office
include routine diagnostic services, patient evaluation and management
services, and coordination of care and ancillary services such as laboratory,
x-ray, and pharmacy services.
CANCER CENTERS. At December 31, 1996, the Company operated 17 cancer
centers, had five additional centers under development, and one cancer center
undergoing significant expansion. Each of the Company's cancer centers is
designed and equipped to provide substantially all of the outpatient diagnostic
and treatment programs necessary to treat a cancer patient. Among the many
services offered at a cancer center, in addition to medical oncology and
radiation therapy services, are diagnostic radiology, patient education and
support services, infusion chemotherapy, pharmacy services, and nutritional
counseling. In addition, the typical cancer center has community rooms,
facilities for patient meetings and patient self-help programs, counseling
areas, and training facilities. Each of the Company's free-standing cancer
centers is equipped with at least one linear accelerator and a simulator that
is used to plan radiation treatment, a pharmacy, and a laboratory. Most of the
cancer centers have infusion areas where chemotherapy lasting several hours can
be administered and infusion rooms where more complex chemotherapies, which
historically required hospitalization, can be administered.
A typical cancer center has two medical oncologists, one radiation
oncologist, and eight support personnel for each physician. The support
personnel include nurses, lab and radiology technicians, a physicist, a
pharmacist, and patient service coordinators.
The Company's cancer centers are either free-standing or located
adjacent to an acute care hospital. The Company's free-standing cancer centers
generally are located in close proximity to other health care providers. The
cancer centers located adjacent to an acute care hospital are located in Tyler
(Mother Francis Hospital), Dallas (Baylor University Medical Center), Arlington
(South Arlington Hospital), Midland (Midland Memorial Hospital), and North
Dallas (Columbia Hospital at Medical City Dallas). The Company's largest cancer
center is the Sammons Cancer Center located adjacent to Baylor University
Medical Center ("BUMC") in Dallas, Texas. The Sammons Cancer Center is staffed
by 16 medical oncologists, three gynecological oncologists, four radiation
oncologists, and three diagnostic radiologists. Services offered at this center
that are not offered at most of the Company's other cancer centers include
breast diagnostic imaging, gynecological oncology, outpatient bone marrow
transplantation, and high dose chemotherapy with stem cell transplant support.
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RETAIL PHARMACY SERVICES
At December 31, 1996, the Company operated 24 pharmacies and had four
additional pharmacies under development. Each of the Company's pharmacies are
located within the Company's physician offices or cancer centers. These
pharmacies offer a full range of cancer pharmaceuticals and supplies from a
variety of manufacturers. Each pharmacy is managed by a registered pharmacist
and employs additional support staff.
The pharmacies are licensed as retail pharmacies. The Company's
pharmaceutical services include preparation of (i) chemotherapy products
administered in the Company's facilities, (ii) research medications, (iii)
chemotherapy-related retail prescriptions, and (iv) pharmaceuticals for
ambulatory infusion and home infusion. Clinical services provided by the
pharmacies include monitoring drug interactions; educating patients; providing
drug information to physicians, nurses, and patients; and ongoing drug
utilization reviews.
CLINICAL RESEARCH
The Company manages clinical trials on behalf of pharmaceutical
companies and biotechnology companies. In general, the clinical trial programs
relate to research designed to focus on: (i) improving cancer survival rates;
(ii) studying therapies that may improve a patient's quality of life; (iii)
exploring ways to lower the costs of cancer treatment; and (iv) developing
innovative cancer treatments in conjunction with pharmaceutical and
biotechnology companies. The Company assists in a number of aspects in the
conduct of clinical trials including protocol development, data coordination,
institutional review board coordination, contract review and negotiation,
pharmacy services, and clinical facilities.
SERVICE AGREEMENTS
The Company provides services for physicians under long-term service
agreements (the "Service Agreements") with physician groups (the "Affiliated
Physician Groups"). Under the Service Agreements, the Company is typically the
sole and exclusive manager of all day-to-day business functions of physicians
employed by Affiliated Physician Groups, providing facilities, equipment,
supplies, support personnel, and management and financial advisory services.
Specifically, the Company, among other things, (i) prepares annual financial
statements, (ii) purchases inventories and supplies, (iii) manages billing and
collecting, (iv) supervises and maintains custody of files and records, (v)
performs clerical, accounting, and computer services functions, (vi) advises on
public relations and advertising, and (vii) assists in the recruitment of
physicians. In return, the Company receives a monthly fee. The Service
Agreements generally have 40 year initial terms with automatic five-year
extensions thereafter unless either party gives notice to the other not to
renew prior to the expiration of the term. The Service Agreements are not
terminable earlier by the Affiliated Physician Groups except in the event of
the Company's bankruptcy or a material breach of the Service Agreement. In
addition, an operating board is formed under each of the Service Agreements.
The operating board has equal representation from the Company and the
Affiliated Physician Group. The operating board meets periodically, approves
certain items having a significant impact on the Affiliated Physician Group,
and advises the Company on the management, administrative policies, and
development of the oncology network and related facilities.
COMPETITION
The business of providing management services to physicians is highly
competitive. The Company is aware of several competitors focusing exclusively
on the management of oncology practices and several health care companies
providing at least some management services to oncologists. In addition, there
are numerous other companies, including hospitals, large medical group
practices, health maintenance organizations, and insurance companies, that are
expanding their presence in the physician
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management market. Some of the Company's competitors have longer operating
histories and significantly greater resources than the Company.
The Affiliated Physician Groups, upon whose success the Company is
dependent, also face significant competition for providing medical and related
services and for the recruitment of physicians and nonphysician personnel.
Hospitals, sole practitioners, single and multi-specialty medical groups, and
managed care organizations all compete with the Affiliated Physician Groups.
GOVERNMENT REGULATION
As a participant in the health care industry, the Company's operations
and relationships are subject to extensive and increasing regulation by a
number of governmental entities at the federal, state, and local levels. The
Company is also subject to laws and regulations relating to business
corporations in general. The Company believes its operations are in material
compliance with applicable laws. Nevertheless, many aspects of the Company's
business operations, including the structure of the relationship between the
Company and the Affiliated Physician Groups, have not been the subject of state
or federal regulatory interpretation.
Approximately 50% of the revenues of the Affiliated Physician Groups
is derived from payments made by government-sponsored health care programs
(principally, Medicare and Medicaid). As a result, any change in government
reimbursement regulations, policies, practices, interpretations or statutes
could adversely affect the operations of the Company. The Federal Medicare
program is based on a system of reimbursement for physician services, known as
the resource based relative value scale schedule ("RBRVS"). The Company expects
that annual adjustments to RBRVS payment levels and other future changes in
Medicare reimbursement will continue to result in a reduction from historical
levels in the per-patient Medicare revenue received by the Affiliated Physician
Groups.
The laws of many states prohibit business corporations such as the
Company from practicing medicine, employing physicians to practice medicine, or
engaging in activities such as fee-splitting with physicians. The Company does
not employ physicians to practice medicine, does not represent to the public or
its clients that it offers medical services, and does not control the clinical
aspects of the practice of medicine by the physicians with whom it contracts.
Accordingly, the Company believes that it is not in violation of applicable
state laws relating to the practice of medicine and that its receipt of a
management fee for services provided to the Affiliated Physician Groups does
not violate laws prohibiting certain fee-splitting arrangements. The laws in
most states regarding fee splitting and the corporate practice of medicine have
been subjected to limited judicial and regulatory interpretation and,
therefore, no assurances can be given that the Company's activities will be
found to be in compliance, if challenged. In addition, expansion of the
operations of the Company to certain jurisdictions may require structural and
organizational modifications of the structure of the Company's relationships
with physician groups.
Certain provisions of the Social Security Act, commonly referred to as
the "Anti-kickback Statute," prohibit the offer, payment, solicitation, or
receipt of any form of remuneration in return for the referral of Medicare or
state health program patients or patient care opportunities, or in return for
the purchase, lease, or order of items or services that are covered by Medicare
or state health programs. The Anti-kickback Statute is broad in scope and has
been broadly interpreted by courts in many jurisdictions. Read literally, the
statute places at risk many legitimate business arrangements, potentially
subjecting such arrangements to lengthy, expensive investigations and
prosecutions initiated by federal and state governmental officials. The
applicability of the Anti-kickback statute and other related state and federal
statutes to business relationships and transactions such as exist between the
Company and the Affiliated Physician Groups, has not been subject to any
significant judicial or regulatory interpretation. The Company believes that
its receipt of payments from physician groups for services provided pursuant to
the Service Agreements does not violate the Anti-kickback Statute since the
Company does not receive remuneration for nor is it in a position to make or
influence, the referrals of patients or services reimbursed under government
programs to the Affiliated Physician Groups. To the extent the Company is
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deemed to be either a referral source or a separate provider under the Service
Agreements and to receive referrals from physicians, it could be subject to
scrutiny and prosecution for any violation of the Anti-kickback Statute.
Violation of the Anti-kickback Statute is a felony, punishable by fines of up
to $25,000 per violation, exclusion from participation in Medicare or Medicaid,
and imprisonment for up to five years. In addition, the U.S. Department of
Health and Human Services may impose civil penalties excluding violators from
participation in Medicare or state health programs.
In 1991, in part to address concerns regarding the breadth of the
Anti-kickback Statute, the Federal government published regulations that
provide exceptions, or "safe harbors," for transactions that will be deemed not
to violate the Anti-kickback Statute. Additional safe harbors were published in
1993 offering new protections under the Anti-kickback Statute to eight
activities, including referrals within group practices consisting of active
investors. Compliance with the safe harbors is not required; however, financial
relationships which do not fit within a safe harbor are subject to government
scrutiny and potential prosecution under the broad prohibition of the
Anti-kickback Statute. Although the Company believes that its operations are in
material compliance with the Anti-kickback Statute, such operations do not fit
within any of the existing safe harbors in part because the aggregate annual
payment to the Company under the Service Agreements is not established in
advance but, rather, is based on a predetermined formula.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993 ("OBRA"). These
prohibitions commonly known as "Stark II," amended prior physician
self-referral legislation known as "Stark I" by dramatically enlarging the
field of physician-owned or physician-interested entities to which the referral
prohibitions apply. Effective January 1, 1995, Stark II prohibits a physician
from referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment
interest, or with which the physician has entered into a compensation
arrangement. The designated health services include diagnostic radiology
services, radiation therapy services, physical and occupational therapy
services, durable medical equipment, parenteral and enteral nutrients,
equipment, and supplies, prosthetic devices, orthotics, prosthetics, outpatient
prescription drugs, home health services, and inpatient and outpatient hospital
services. The penalties for violating Stark II include a prohibition on payment
by these government programs, civil penalties of as much as $15,000 for each
violative referral, and $100,000 for participation in a "circumvention scheme."
To the extent that the Company or any of its Affiliated Physician Groups is
deemed to be subject to the prohibitions contained in Stark II, the Company
believes its activities fall within the permissible activities defined in Stark
II.
In performing administrative billing and collection services for
Affiliated Physician Groups, the Company is subject to state and federal laws
which govern the submission of claims for reimbursement. These laws generally
prohibit an individual or entity from knowingly and willfully presenting a
claim (or causing a claim to be presented) for payment from Medicare, Medicaid,
or other third-party payors that is false or fraudulent. The standard for
"knowing and willful" often includes conduct that amounts to a reckless
disregard for whether accurate information is presented by claims processors.
Penalties under these statutes include substantial civil and criminal fines,
exclusion from the Medicare program, and imprisonment. One of the most
prominent of these laws is the Federal False Claims Act, which may be enforced
by the Federal government directly or by a qui tam plaintiff on the
government's behalf. Under the False Claims Act, both the government and the
private plaintiff, if successful, are permitted to recover substantial monetary
penalties as well as an amount equal to three times actual damages. In recent
cases, some qui tam plaintiffs have taken the position that violations of the
Anti-kickback Statute and Stark II should also be prosecuted as violations of
the Federal False Claims Act. Although the Company believes that it has
procedures to ensure the accurate completion of claims forms and requests for
payment, the laws and regulations defining the parameters of proper Medicare or
Medicaid billing are frequently unclear and have not been subjected to
extensive judicial or agency interpretation. Billing errors can occur despite
the Company's best efforts to prevent or correct them, and no assurances can be
given that the government will regard such errors as inadvertent and not in
violation of the False Claims Act or related statutes.
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EXECUTIVE OFFICERS
The following table sets forth information concerning executive
officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Merrick H. Reese, M.D. 59 President and Chief Executive Officer
Joseph S. Bailes, M.D. 40 Executive Vice President and National Medical
Director
Pam J. Burgess 36 Executive Vice President and Chief Operating
Officer
George P. McGinn, Jr. 41 Executive Vice President, General Counsel, and
Secretary
Robert J. Whren 46 Executive Vice President - Subsidiary Operations
</TABLE>
MERRICK H. REESE, M.D. has been Chairman of the Board, President, and
Chief Executive Officer of the Company since its formation in June 1993. Dr.
Reese has been president and a director of TOPA since 1983. Dr. Reese received
his medical degree from The University of Texas Southwestern Medical School at
Dallas in 1963 and is a board certified medical oncologist.
JOSEPH S. BAILES, M.D. has been a director, Executive Vice President,
and National Medical Director of the Company since its formation in June 1993.
Since 1986, Dr. Bailes has been employed as a medical oncologist by TOPA. Dr.
Bailes received his medical degree from The University of Texas Southwestern
Medical School at Dallas in 1981 and is a board certified medical oncologist.
Dr. Bailes is also an advisory director of Texas Regional Bancshares, Inc.
PAM J. BURGESS has served as Executive Vice President and Chief
Operating Officer of the Company since May 1996. Ms. Burgess served as
Executive Vice President-Clinical Operations from January 1996 to May 1996.
Prior to joining the Company, Ms. Burgess was with Columbia/HCA Healthcare
Corporation for twelve years, most recently serving as Chief Operating Officer
of Columbia Hospital at Medical City Dallas from November 1993 until joining
the Company. Ms. Burgess was the Chief Executive Officer of Lake Area Medical
Center, Lake Charles, Louisiana from March 1990 until November 1993.
GEORGE P. MCGINN, JR. has been Executive Vice President and General
Counsel of the Company since May 1995, and Secretary since May 1996. For 10
years prior to May 1995, Mr. McGinn was engaged in the private practice of law
with Bass, Berry & Sims PLC in Nashville, Tennessee.
ROBERT J. WHREN has served as Executive Vice President - Subsidiary
Operations of the Company since April 1994, as President of TOPS since June
1993, and as a director of TOPS since September 1993. From February 1991 to
June 1993, Mr. Whren served as Senior Vice President - Operations for Cellcor,
a biotechnology company providing adoptive immune therapy cancer treatments.
EMPLOYEES
At December 31, 1996, the Company had 1,141 employees. The Company
believes that its relations with its employees are good.
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ITEM 2. PROPERTIES
The Company's principal executive offices are located in approximately
66,000 square feet of space in Dallas, Texas, subject to a lease agreement that
expires in August 2001. The Company's management information systems, including
its computer hardware, are located in an 11,000 square foot building owned by
the Company located in Garland, Texas. The Company's Financial Services
operations are located in approximately 22,000 square feet of space in Dallas,
Texas, subject to a lease agreement that expires in January 2001.
At December 31, 1996, the Company operated 17 cancer centers, had five
cancer centers under development, and one cancer center undergoing significant
expansion. Of the 17 cancer centers operated by the Company, ten are owned by
the Company and seven are operated pursuant to lease agreements. The lease
agreements for the cancer centers are operating leases with a term of ten
years, except for the Tyler Cancer Center which has a lease term of 15 years
and the Las Cruces Cancer Center which has a lease term expiring in April 1998.
Of the 17 cancer centers operated by the Company, four were acquired as
existing cancer centers and 13 have been developed by the Company. The
following table contains information concerning the Company's cancer centers.
<TABLE>
<CAPTION>
Size Owned/
Location (square feet) Date Opened Leased
-------- ------------- ----------- ------
<S> <C> <C> <C>
Plano, Texas(1)..................... 19,730 March 1988 Owned
Sherman, Texas(1)................... 24,541 October 1988 Owned
Paris, Texas(1)..................... 21,800 November 1992 Owned
Longview, Texas(1).................. 24,800 May 1993 Owned
Odessa, Texas(1).................... 29,400 June 1994 Leased
Tyler, Texas(2)..................... 18,400 August 1994 Leased
McAllen, Texas(1)................... 32,300 August 1994 Owned
Dallas, Texas(2).................... 105,000 August 1994 Leased
Arlington, Texas(2)................. 21,900 December 1994 Leased
Midland, Texas (2).................... 18,500 April 1995 Leased
Brownsville, Texas(1)............... 21,100 May 1995 Owned
Mesquite, Texas(1).................. 28,000 September 1995 Owned
Southwest Dallas, Texas(1).......... 28,000 September 1995 Owned
North Dallas, Texas (2)............. 52,400 October 1995 Leased
El Paso, Texas (1)..................... 34,600 April 1996 Owned
Las Cruces, New Mexico (1)........ 7,200 April 1996 Leased
El Paso, Texas (1)..................... 29,200 June 1996 Owned
</TABLE>
(1) Denotes a free-standing cancer center.
(2) Denotes a cancer center located adjacent to an acute care hospital.
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ITEM 3. LEGAL PROCEEDINGS
The provision of medical services and the conduct of clinical trials
by physician groups with which the Company contracts entail an inherent risk of
professional liability claims. The Company does not control the practice of
medicine by physicians or the compliance with certain regulatory and other
requirements directly applicable to physicians and physician groups. Because
the Company purchases and resells pharmaceutical products and related medical
supplies, it faces the risk of product liability claims. Although the Company
has not been a party to any claims, suits, or complaints relating to services
and products provided by the Company or physicians to whom the Company provides
services, there can be no assurance that such claims will not be asserted
against the Company in the future. The Company maintains insurance coverage
that it believes to be adequate both as to risks and amounts. In addition,
pursuant to the Service Agreements, the Affiliated Physician Groups are
required to maintain comprehensive professional liability insurance. Successful
malpractice claims asserted against Affiliated Physician Groups or the Company
could, however, have a material adverse effect on the Company.
In March 1996, Methodist Hospitals of Dallas ("Methodist") filed a
lawsuit in the District Court of Dallas County, Texas against the Company and
TOPA. This lawsuit asserts various claims, including claims of monopolization,
conspiracy to monopolize, attempted monopolization, unfair competition, and
tortious interference with actual and prospective contractual relationships.
Methodist is seeking both injunctive relief and unspecified monetary and
punitive damages. This matter is set for trial in November 1997. The Company
has denied each of Methodist's claims, believes this lawsuit is without merit,
and intends to vigorously defend itself. The Company is not aware of any
governmental actions to assert claims against TOPA or the Company similar to
those asserted by Methodist.
On or about September 12, 1996, the Company was named as a defendant in a
suit styled Alan Hinerfeld On Behalf of Himself and All Others Similarly
situated v. Physician Reliance Network, Inc., Merrick H. Reese, Joseph S.
Bailes, Randall D. Kurtz, Robert W. Daly, Robert J. Whren, Merrill Lynch,
Pierce Fenner & Smith, Inc., Smith Barney, Inc., Piper Jaffray Inc., and Cowen
& Company, in the 14th Judicial District Court, Dallas County, Texas
("Hinerfeld"). On or about September 17, 1996, the Company was named as a
defendant in a suit styled Susan Kaufman on Behalf of Herself and All Others
Similarly Situated v. Physician Reliance Network, Inc., Texas Oncology, P.A.,
Merrick H. Reese, Joseph S. Bailes, J. Ernest Sims, Pamela Burgess, Randall D.
Kurtz, Robert W. Daly and Robert J. Whren in the United States District Court
for the Northern District of Texas, Dallas Division ("Kaufman"). On or about
October 15, 1996, the Company was named as a defendant in a suit styled Robert
N. Abendschein, On Behalf of Himself and All Others Similarly Situated v.
Physician Reliance Network, Inc., Texas Oncology, P.A., Merrick H. Reese,
Joseph S. Bailes, Randall D. Kurtz, J. Ernest Sims, Robert J. Whren, Robert W.
Daly and Pamela Burgess, in the 134th Judicial District Court, Dallas County,
Texas ("Abendschein"). By order dated December 16, 1996, the Abendschein case
was consolidated with the Hinerfeld action. On or about March 3, 1997, the
Abendschein state court suit was dismissed without prejudice, and on or about
March 11, 1997, plaintiff Abendschein joined the Kaufman Federal court suit.
Pamela Burgess is no longer a named defendant in the Kaufman action. Kaufman
seeks recovery on behalf of all persons who purchased shares of the Company's
common stock on the open market from February 12, 1996, to July 11, 1996, and
alleges claims under Sections 10b and 20(a) of the Federal Securities Exchange
Act of 1934, and under Rule 10b-5 promulgated thereunder. Hinerfeld seeks
recovery on behalf of persons who purchased stock between April 23, 1996, and
July 11, 1996, in the April 1996 public offering of the Company's common stock
and alleges claims under Sections 11,12(a)(2)and 15 of the Federal Securities
Act of 1933 and the Texas Securities Revised Civil Statutes Section 581-33. As
relief, Kaufman asserts that, if a class is certified, damages will exceed
$64,482,458. Hinerfeld seeks unspecified monetary damages.
On September 4, 1996, the Company was named as a defendant in a similar
suit styled Charles J. Jackson v. Physician Reliance Network, Inc., Texas
Oncology, P.A.; Smith Barney, Inc.; Cowen & Co., Inc.; Merrill Lynch, Pierce,
Fenner & Smith, Inc.; Piper Jaffray, Inc., Merrick H. Reese, M.D.,
Individually; Joseph S. Bailes, M.D., Individually; and J. Ernest Sims,
Individually, in the 214th Judicial District court, Nueces County, Texas
("Jackson"). Through an amended pleading, Jackson purports to represent a class
of all persons who purchased and presently own shares of the Company's common
stock from November 1994 through September 4, 1996. Jackson asserts claims
under Sections 11 and 15 of the federal Securities Act and the Texas Securities
Act. J. Ernest Sims is no longer a named defendant in the Jackson action, but
Randall D. Kurtz has been named as a defendant. As relief, Jackson seeks
$1,380 plus interest thereon as his costs for purchasing the Company's common
stock. Jackson seeks unspecified monetary damages on behalf of the class.
Responsive pleadings have been filed, plaintiffs have moved for class
certification, and discovery has commenced in all three suits.
In general, Jackson, Kaufman, and Hinerfeld assert that the Company has
engaged in certain improper accounting practices, that the relationship between
the Company and certain of the Affiliated Physician Groups have charged the
Medicare program amounts in excess of the cost of delivering certain services.
The Company believes that the lawsuits are without merit and intends to
vigorously defend itself. The Company is not aware of any governmental actions
to assert claims against TOPA or the Company similar to those in this
litigation.
9
<PAGE> 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Common Stock is traded on the Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol: PHYN. The following
table sets forth the range of high and low bid prices of the Common Stock for
each of the years ended December 31, 1996 and 1995, as reported on the Nasdaq
National Market. Prices have been adjusted to reflect a two-for-one stock split
effected in the form of a 100% stock dividend on June 10, 1996.
<TABLE>
<CAPTION>
High Low
-------------- --------------
<S> <C> <C>
1995
First Quarter .................... $13.25 $ 9.25
Second Quarter ................. 13.00 8.63
Third Quarter ................... 18.63 9.50
Fourth Quarter .................. 21.50 15.13
1996
First Quarter .................... 23.63 18.63
Second Quarter ................. 27.50 19.25
Third Quarter.................... 22.75 10.50
Fourth Quarter................... 15.50 4.75
</TABLE>
As of March 24, 1997, there were approximately 495 shareholders of
record and approximately 7,775 beneficial shareholders of the Common Stock. The
Company has not declared or paid any cash dividends on its Common Stock. The
payment of cash dividends in the future will depend on the Company's earnings,
financial condition, capital needs, and other factors deemed pertinent by the
Company's Board of Directors, including the limitations, if any, on the payment
of dividends under state law and then-existing credit agreements. It is the
present policy of the Company's Board of Directors to retain earnings, if any,
to finance the operations and expansion of the Company's business. In addition,
the Company's revolving credit facility does not currently permit the payment
of cash dividends.
Except as described below in response to this item, no securities of the
Company have been sold by the Company during the fiscal year ended December 31,
1996 without registration under the Securities Act, all of which have been, or
will be, issued in reliance on Section 4(2) of the Securities Act. The numbers
of shares and prices per share set forth below for all transactions prior to
June 10, 1996 have been adjusted to reflect a two-for-one stock split, effected
in the form of a stock dividend on June 10, 1996.
On December 20, 1995, the Company entered into an Agreement and Plan of
Reorganization with Central Maryland Oncology Group, P.A. ("CMOG") and agreed to
issue to CMOG, as partial consideration for the assets purchased, shares of
Common Stock having an aggregate value of $1,900,000. On January 1, 1996, the
Company issued 111,798 shares of Common Stock to CMOG.
On December 20, 1995, the Company entered into an Asset Purchase
Agreement with John C. Downs, M.D., P.A. ("Downs") and agreed to issue to Downs,
as partial consideration for the assets purchased, shares of Common Stock having
an aggregate value of $615,697, $165,697 of which will be issued on January 1,
1997; $225,000 of which will be issued on January 1, 1998; and $225,000 of which
will be issued on January 1, 1999.
On March 1, 1996, the Company entered into a Purchase Agreement with
Oncology Associates, P.A. ("OA") and agreed to issue to OA, as partial
consideration for the assets purchased, 101,120 shares of Common Stock, 25% of
which were issued on March 1, 1997, and an additional 25% of which will be
issued on each of March 1, 1998, March 1, 1999, and March 1, 2000.
10
<PAGE> 11
On June 15, 1996, the Company granted options to purchase 25,488
shares of Common Stock at a purchase price of $22.25 per share to G.S. Cyprus,
M.D. ("Cyprus") as partial consideration for the purchase of the assets
relating to Cyprus' medical practice by the Company.
On March 25, 1996, the Company entered into a Purchase of Assets
agreement with Barbara Haley, M.D., Cheryl Harth, M.D., and Southwest Blood &
Cancer Specialists, P.A. (collectively, "Harth, Haley, & Blood"), and agreed to
issue to Harth, Haley, and Blood, as partial consideration for the assets
purchased, 42,000 shares of Common Stock,14,000 of which were issued on May 1,
1996, and 7,000 shares of Common Stock which will be issued on each of January
1, 1997, 1998, 1999, and 2000.
On June 1, 1996, the Company entered into a Purchase Agreement with
Capitol District Oncology, P.C. ("CD") and agreed to issue to CD, as partial
consideration for the assets purchased, shares of Common Stock having an
aggregate value of $4,500,000, $1,125,000 of which $1,125,000 will be issued on
each of June 1, 1997, 1998, 1999, and 2000.
On July 12, 1996, the Company entered into a Service Agreement with
Minnesota Oncology Hematology, P.A. ("MOHPA") effective July 1, 1996, and agreed
to issue to MOHPA, as partial consideration for entering into the Service
Agreement, shares of Common Stock valued at $4,502,238, of which 32,101 shares
were issued effective July 1, 1996 and $750,373 will be issued at each of July
1, 1997, 1998, 1999, 2000, and 2001. In addition, the Company agreed to issue to
MOHPA, as partial consideration for entering into the Service Agreement, 166,746
shares of Common Stock, of which 27,291 shares of Common Stock were issued
effective July 1, 1997, and 27,291 shares of Common Stock will be issued on each
of July 1, 1997, 1998, 1999, 2000, and 2001.
On September 15, 1996, the Company entered into a Service Agreement
with Northeast New York Cancer Care, P.C. ("NENY") effective September 13,
1996, and agreed to issue to NENY, as partial consideration for entering into
the Service Agreement, 69,024 shares of Common Stock, of which 17,256 shares of
Common Stock will be issued on each of September 16, 1997, 1998, 1999, and
2000.
On November 6, 1996, the Company entered into a Service Agreement with
Donald C. Patterson, Inc. ("Patterson") and agreed to issue to Patterson, as
partial consideration for entering into the Service Agreement, shares of Common
Stock valued at $700,000, of which $175,000 will be issued at each of November
6, 1997, 1998, 1999, and 2000.
On December 9, 1996, the Company entered into a Stock Purchase
Agreement with Hematology-Oncology Associates, Inc. ("HOA") and agreed to issue
to HOA 634,920 shares of Common Stock as partial consideration for the
acquisition of HOA, for the formation of a new company (NEWCO) by the sellers
of HOA, and for entering into a Service Agreement between the Company and
NEWCO. The Company issued 288,600 shares of Common Stock on January 1, 1997,
and 86,580 shares of Common Stock will be issued on each of December 8, 1997,
1998, 1999, and 2000.
11
<PAGE> 12
On December 9, 1996, the Company entered into a Partnership Purchase
Agreement with. the partners of Medical Oncology Hematology Associates ("MOHA")
and agreed to issue to MOHA 172,965 shares of Common Stock as partial
consideration for the acquisition of the MOHA partnership interests, for the
formation of NEWCO by the partners of MOHA, and for the entering into a Service
Agreement between the Company and NEWCO. The Company issued 86,616 shares of
Common Stock on January 1, 1997; 21,655 shares of Common Stock will be issued
on each of December 8, 1997, 1998, and 1999; and 21,654 shares of Common Stock
will be issued on December 8, 2000.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables set forth selected consolidated financial data of
the Company, which should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and with the
Company's Consolidated Financial Statements and Notes thereto included
elsewhere herein. The selected consolidated financial data for the years ended
September 30, 1992, 1993 and 1994, the three months ended December 31, 1994,
and the years ended December 31, 1995 and 1996, have been derived from the
consolidated financial statements of the Predecessor Entities and the Company
audited by Arthur Andersen LLP, independent public accountants. The selected
consolidated financial data for the three months ended December 31, 1993, has
been derived from the unaudited consolidated financial statements of the
Company which, in the opinion of management, include all adjustments (which
consist of only normal recurring adjustments) necessary for a fair presentation
of the financial condition and results of operations of the Company for that
period.
<TABLE>
<CAPTION>
Predecessor Company
Entities
------------------ -----------------------------------------------------------
Year Ended Year Ended Three Months Year Ended
September 30, September 30, Ended December 31,
December 31,
------------------ --------------------------------- ----------------------
1992 1993 1994 1993 1994 1995 1996
------- ------- --------- -------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Management fees ............... $ 26,414 $ 38,112 $ 55,970 $ 11,788 $ 21,674 $129,222 $224,493
Other revenues ................ 1,520 1,808 3,270 281 1,510 8,051 13,826
-------- -------- -------- -------- -------- -------- --------
Total revenues ............. 27,934 39,920 59,240 12,069 23,184 137,273 238,319
Salaries and benefits ......... 9,169 12,436 18,866 3,988 6,750 37,778 66,879
Pharmaceuticals and supplies .. 7,673 10,653 15,996 3,190 5,674 33,605 70,822
General and administrative .... 6,249 10,245 14,718 2,951 6,559 34,260 49,018
Reorganization ................ __ 647 __ __ __ __ __
Depreciation and amortization.. 537 1,783 2,487 512 1,253 7,653 15,894
-------- -------- -------- -------- -------- -------- --------
Income before interest, taxes,
and extraordinary item ...... 4,306 4,156 7,173 1,428 2,948 23,977 35,706
Interest expense .............. 408 1,276 1,682 377 604 672 1,939
-------- -------- -------- -------- -------- -------- --------
Income before income taxes
and extraordinary item...... 3,898 2,880 5,491 1,051 2,344 23,305 33,767
Income taxes .................. 590 371 3,128 1,388 929 9,190 13,271
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary
item ........................ 3,308 2,509 2,363 (337) 1,415 14,115 20,496
Extraordinary item ............ -- -- (302) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ............. $ 3,308 $ 2,509 $ 2,061 $ (337) $ 1,415 $ 14,115 20,496
======== ======== ======== ======== ======== ======== ========
Net income (loss) before
extraordinary item per
Common share (4) ............ $ .08 $ (.01) $ .04 $ .34 .43
Extraordinary item per
common share(4) ............. (.01) -- -- -- --
Net income (loss) per
common share (4) ............ $ .07 $ (.01) $ .04 $ .34 .43
BALANCE SHEET DATA:
Working capital ................ $ 3,422 $ 1,276 $ 19,484 $ 23,162 $ 28,378 $ 52,626 $ 78,769
Total assets ................... 27,091 40,583 85,923 47,937 98,886 204,633 355,341
Long-term debt ................. 13,237 19,554 38,838 22,725 -- 26,973 14,121
Redeemable convertible
preferred stock.............. -- -- 24,400 10,000 -- -- --
Stockholders' equity ........... 6,704 8,653 5,995 3,498 80,622 145,734 294,776
</TABLE>
(1) Amount represents cost incurred in connection with the Reorganization. See
Note 1 of Notes to the Company's Consolidated Financial Statements.
(2) Amount includes $1,250 of deferred taxes for the assets acquired during
the Reorganization. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 7 of Notes to the Company's
Consolidated Financial Statements.
(3) Amount represents early retirement of debt as of March 1994 in connection
with consolidating substantially all of the Company's indebtedness under a
single credit facility. The amount is net of a deferred tax benefit of
$156. See Note 11 of Notes to the Company's Consolidated Financial
Statements.
(4) Per share data for the periods prior to the fiscal year ended September
30, 1994 is not presented because there is no reasonable basis to estimate
the number of shares of Common Stock that would have been outstanding in
these periods. Per share data presented for periods prior to the year
ended December 31,1996, has been restated to reflect a two-for-one stock
split that was effected in the form of a 100% stock dividend on June 10,
1996. See Note 10 of Notes to the Company's Consolidated Financial
Statements.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
OVERVIEW
The Company provides the management services, facilities,
administrative and technical support, and ancillary services necessary for
physicians to establish and maintain a fully-integrated network of outpatient
oncology care. The Affiliated Physician Groups provide all aspects of care
related to the diagnosis and treatment of cancer on an outpatient basis,
including medical oncology, radiation oncology, gynecological oncology, and
diagnostic radiology. The Company earns its revenues principally for services
provided under its Service Agreements with the Affiliated Physician Groups. The
Company's management fees (the "Management Fees") are equal to gross medical
billings of the Affiliated Physician Groups ("Gross Medical Billings") less
contractual discounts, provision for uncollectible accounts, and amounts
retained by physicians pursuant to the Service Agreements ("Amounts Retained by
Physicians"). The method of determining the Management Fee earned by the
Company varies by agreement.
The Company's most significant service agreement is with TOPA ("Texas
Service Agreement"), and the management fees paid by TOPA accounted for
approximately 85% of the Company's Management Fees for the year ended December
31, 1996. Effective January 1, 1996, the method of calculating the Company's
Management Fee under the Texas Service Agreement was amended. Prior to the
amendment, the Management Fee was based upon a percentage of Medical Practice
Revenues. Under the amended Texas Service Agreement, the Management Fee is
based upon a percentage of earnings before interest and taxes ("Earnings") plus
the nonphysician expenses of the related practice locations. The Company and
TOPA believe that this change in calculating the Management Fee and the related
Amounts Retained by Physicians better aligns the incentives of the Company and
TOPA for the development and the expansion of services and locations as well as
the management of the cost of providing services. The Company believes that as
capitated agreements or case rates with payors increase, a management fee based
upon Earnings is more appropriate and that an increasing percentage of its
Management Fees in the future will be from Service Agreements with a Management
Fee based upon Earnings rather than a percentage of Medical Practice Revenues.
During the year ended December 31, 1996, approximately 90% of the Company's
Management Fees was derived from Service Agreements with a Management Fee based
upon Earnings.
Effective December 31, 1994, the Company adopted a December 31 fiscal
year end. The following table summarizes the derivation of Management Fees for
the periods indicated (in thousands).
14
<PAGE> 15
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
--------- ---------------------- ----------------------
1994 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gross Medical Billings ...................... $ 103,192 $ 20,935 $ 42,802 $ 300,957 $ 484,954
Contractual Discounts ....................... (14,101) (2,699) (7,605) (105,490) (180,705)
--------- --------- --------- --------- ---------
Medical Practice Revenues ................. 89,091 18,236 35,197 195,467 304,249
Provision for uncollectible accounts ........ (2,778) (529) (851) (4,803) (7,342)
--------- --------- --------- --------- ---------
86,313 17,707 34,346 190,664 296,907
Amounts Retained by Physicians .............. (30,343) (5,919) (12,672) (61,442) (72,414)
--------- --------- --------- --------- ---------
Management Fees ........................... $ 55,970 $ 11,788 $ 21,674 $ 129,222 $ 224,493
========= ========= ========= ========= =========
</TABLE>
Effective January 1, 1995, TOPA converted to a single fee schedule for
billing purposes. The effect of converting to a single fee schedule was to
increase the amounts shown as Gross Medical Billings and increase the related
Contractual Discounts. The Company believes that this change improves its
ability to analyze changes in Medical Practice Revenues.
The following table sets forth the percentages of total revenue
represented by certain items reflected in the income statement. The information
that follows should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------- -------------------------- -------------------------------
1994 1993 1994 1995 1996
------------- ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Management fees 94.5% 97.7% 93.5% 94.1% 94.2%
Other revenues 5.5 2.3 6.5 5.9 5.8
------------- ----------- ---------- ------------- ------------
Total revenues 100.0 100.0 100.0 100.0 100.0
Salaries and benefits 31.9 33.0 29.1 27.5 28.1
Pharmaceutical and 27.0 26.5 24.5 24.5 29.7
supplies
General and administrative 24.8 24.5 28.3 25.0 20.6
Depreciation and 4.2 4.2 5.4 5.6 6.7
amortization
------------- ----------- ---------- ------------- ------------
Income before interest
expense, 12.1 11.8 12.7 17.4 14.9
taxes, and
extraordinary item
Interest expense 2.8 3.1 2.6 0.5 0.8
------------- ----------- ---------- ------------- ------------
Income before income
taxes and 9.3 8.7 10.1 16.9 14.1
extraordinary item
Income taxes 5.3 11.5 4.0 6.7 5.5
------------- ----------- ---------- ------------- ------------
Income (loss) before
extraordinary item 4.0 (2.8) 6.1 10.2 8.6
Extraordinary item 0.5 - - - -
------------- ----------- ---------- ------------- ------------
Net income (loss) 3.5% (2.8)% 6.1% 10.2% 8.6%
============= =========== ========== ============= ============
</TABLE>
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
MANAGEMENT FEES. Management Fees were $224,493,000 for the year ended
December 31, 1996, compared to $129,222,000 for the year ended December 31,
1995, representing an increase of $95,271,000, or 73.7%. The growth in
Management Fees is attributable to a $108,782,000 increase in Medical Practice
Revenues generated by Affiliated Physician Groups offset by an increase in
Amounts Retained by Physicians of $10,972,000 and an increase in the provision
for uncollectible accounts of $2,539,000. The growth in Medical Practice
Revenues during the year ended December 31, 1996, is due to an increase in the
number of physicians by 84 from 206 to 290; an increase in the number of
service locations from 73 to 106; and expansion of services provided at
existing locations. The increase over the
15
<PAGE> 16
comparable period of the prior year in the number of physicians is comprised of
61 medical oncologists, 9 radiation oncologists, and 14 other physicians.
The Company began expanding its operations outside the State of Texas
in April 1995. Through December 31, 1996, the Company had entered into Service
Agreements with physicians in Iowa, Oregon, Missouri, Washington, Maryland,
Arkansas, New York, Minnesota, and Illinois. The Company's strategy in these
locations is consistent with its past strategies in Texas to develop and expand
the oncology services at these locations ultimately to the provision of
full-service oncology services at a cancer center, if appropriate, as well as
development of an oncology network within the state.
Since December 31, 1995, the Company opened a cancer center in El
Paso, Texas (June 1996) and assumed the operations of existing cancer centers
in El Paso, Texas (April 1996) and Las Cruces, New Mexico (April 1996).
Amounts Retained by Physicians were 23.8% of Medical Practice Revenues
for the year ended December 31, 1996, compared to 31.4% of Medical Practice
Revenues for the comparable period in 1995. This decrease is due to the
expansion of services offered through the Company's existing facilities, the
change in calculating the Management Fee under the Texas Service Agreement, and
the addition of new Service Agreements.
Contractual discounts were 37.3% of Gross Medical Billings for the
year ended December 31, 1996, compared to 35.1% of Gross Medical Billings for
the comparable period in 1995. The provision for uncollectible accounts related
to the Amounts Retained by Physicians was 2.4% of Medical Practice Revenues for
the year ended December 31, 1996, compared to 2.5% for the comparable period in
1995. The provisions for contractual discounts and uncollectible accounts
reflect the Company's current collection experience.
OTHER REVENUES. Other revenues for the year ended December 31, 1996,
were $13,826,000 compared to $8,051,000 for the year ended December 31, 1995,
representing an increase of $5,775,000, or 71.7%. Other revenues are primarily
derived from retail pharmacy operations located in certain of the Company's
cancer centers and larger physician offices, research activities performed by
the Company's affiliated physicians that are sponsored by pharmaceutical
companies, and interest income. The increase in other revenues is primarily a
result of the growth in the number of retail pharmacy locations opened as of
December 31, 1996, to 24 compared to 21 as of December 31, 1995, and the
development of the 12 pharmacy locations that were opened during 1995.
SALARIES AND BENEFITS. Salaries and benefits for the year ended
December 31, 1996, were $66,879,000 compared to $37,778,000 for the year ended
December 31, 1995, representing an increase of $29,101,000, or 77.0%. Salaries
and benefits include costs of clinical nonphysician employees of Affiliated
Physician Groups paid by the Company pursuant to the terms of the Service
Agreements. The dollar increase in the salaries and benefits was due to the
addition of clinical and nonclinical personnel required to support the increase
in Affiliated Physician Groups managed by the Company. The percentage of
salaries and benefits to total revenues was 28.1% for the year ended December
31, 1996, compared to 27.5% for the comparable period in 1995. Beginning in
April 1996, the Company also increased its management infrastructure to support
its development of a national presence. In addition, a larger percentage of the
physicians and related services added since December 31, 1995, are medical
oncologists where revenue enhancements related to the development and
integration of the oncology business through the addition of cancer centers
have not yet occurred. Approximately 64.1% of the physicians in the Affiliated
Physician Groups managed by the Company at December 31, 1996, were medical
oncologists, compared to 60.6% for the comparable period in 1995. The increase
in the percentage of medical oncologists during the year ended December 31,
1996, is a result of the Company's focus on the development of and entry into
new geographical markets where the Company intends to develop an integrated
oncology networks in the future.
16
<PAGE> 17
PHARMACEUTICALS AND SUPPLIES. Pharmaceuticals and supplies for the
year ended December 31, 1996, were $70,822,000 compared to $33,605,000 for the
year ended December 31, 1995, representing an increase of $37,217,000, or
110.7%. The dollar increase in pharmaceuticals and supplies is attributable to
an increase in infusion, radiation, and breast diagnostic services generated by
the Affiliated Physician Groups, both through the increased number of
physicians and the enhancement of services provided in physician offices and
cancer centers. The percentage of pharmaceuticals and supplies to total
revenues was 29.7% for the year ended December 31, 1996, compared to 24.5% for
the year ended December 31, 1995. This increase was primarily a result of a
change in the mix of specialties of the Affiliated Physician Groups managed by
the Company to a larger percentage of medical oncologists and overall cost
increases. Revenues generated by medical oncologists have a greater percentage
of pharmaceutical expenses than revenues generated in a cancer center.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the year ended December 31, 1996, were $49,018,000 compared to $34,260,000 for
the year ended December 31, 1995, representing an increase of $14,758,000, or
43.1%. The increase in general and administrative expenses is attributable in
part to additional occupancy costs of $6,586,000 consisting primarily of rents,
utilities, and property taxes incurred to support additional physician offices
and leased cancer centers that commenced operations during 1995 and 1996.
Purchased services increased $2,251,000 as a result of a $359,000 increase
related to subcontracting for external radiology services; a $380,000 increase
in amounts incurred for outside billing services, primarily for certain
inpatient radiology services; $447,000 for contracting transcription services;
and the remainder for contracting maintenance coverage, temporary personnel,
laundry, and medical waste services to support the growth in the number of
affiliated physicians. This increase was offset, in part, by a $499,000
decrease in laboratory costs resulting from the Company discontinuing certain
services that were subcontracted to BUMC. Other general and administrative
expenses increased $3,376,000 as a result of an increase in telecommunications,
marketing, insurance, and travel expenses to service the additional site
locations and related Affiliated Physician Groups as well as to develop
opportunities for additional management service agreements. The provision for
uncollectible accounts related to Management Fees increased $2,545,000
for the year ended December 31, 1996, and reflects the Company's current
collections experience. The percentage of general and administrative expenses
to total revenues was 20.6% for the year ended December 31, 1996, compared to
25.0% for the year ended December 31, 1995. The decrease in the percentage is
due to the addition of enhanced services at the Company's practice site
locations, primarily during the latter half of 1995, that did not result in
corresponding increases in general and administrative expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
year ended December 31, 1996, was $15,894,000 compared to $7,653,000 for the
year ended December 31, 1995, representing an increase of $8,241,000, or
107.7%. Depreciation increased $6,052,000 as a result of the additional office
and cancer center locations that were opened or assumed by the Company since
1995. Amortization increased $2,189,000 as a result of the increase in Service
Agreement costs incurred as consideration for the Affiliated Physician Groups
entering into Service Agreements. These costs are amortized over the term of
the related Service Agreements.
INTEREST. Interest expense for the year ended December 31, 1996, was
$1,939,000 compared to $672,000 for the year ended December 31, 1995,
representing an increase of $1,267,000, or 188.5%. The increase in interest
expense was due to increased amounts outstanding and owed to Affiliated
Physician Groups as consideration, in part, for entering into Service
Agreements with the Company. In addition, the Company borrowed funds under its
revolving line of credit ("Revolver") at the beginning of 1996, which amounts
were repaid using proceeds from the Company's public offering of Common Stock
in April 1996. No amounts were outstanding under the Revolver at December 31,
1996.
INCOME TAXES. Income taxes were $13,271,000 for the year ended
December 31, 1996, compared to $9,190,000 for the year ended December 31, 1995,
representing an increase of $4,081,000,
17
<PAGE> 18
or 44.4%. Federal income taxes were provided on the taxable income of the
Company at 35%, and state income taxes were provided using the applicable
statutory rates in effect.
YEAR ENDED DECEMBER 31, 1995, COMPARED TO YEAR ENDED SEPTEMBER 30, 1994
MANAGEMENT FEES. Management Fees were $129,222,000 for the year ended
December 31, 1995, compared to $55,970,000 for the year ended September 30,
1994, representing an increase of $73,252,000, or 130.9%. The growth in
Management Fees is attributable to a $106,376,000 increase in Medical Practice
Revenues generated by Affiliated Physician Groups offset by an increase in
Amounts Retained by Physicians of $31,099,000 and an increase in the provision
for uncollectible accounts of $2,025,000. The growth in Medical Practice
Revenues during the year ended December 31, 1995, is due to the increase in the
number of physicians by 77 from 129 to 206; an increase in the number of
service locations from 47 to 73; and the expansion of services provided at
existing locations. The increase over the prior period in the number of
physicians is comprised of 51 medical oncologists, 10 radiation oncologists,
and 16 other physicians.
The Company opened six cancer centers between September 30, 1994 and
December 31, 1995. In addition, the Company began expansion of its management
services to oncology-related physicians outside the State of Texas. During the
year ended December 31, 1995, the Company entered into Service Agreements with
physicians in Iowa (April), Oregon (September), Missouri (October), and
Washington (November), which at December 31, 1995, comprised ten service
locations.
Amounts Retained by Physicians were 31.4% of Medical Practice Revenues
for the year ended December 31, 1995, compared to 34.1% of Medical Practice
Revenues for the year ended September 30, 1994. The decrease in the percentage
in the year ended December 31, 1995, is due to the additional revenues
generated by the Company through expanded services that it provides through its
medical office and cancer center operations.
Contractual discounts were 35.1% of Gross Medical Billings for the
year ended December 31, 1995, compared to 13.7% of Gross Medical Billings for
the year ended September 30, 1994. Effective January 1, 1995, the Company
converted to a single fee schedule for billing purposes. The effect of the
change was to increase Gross Medical Billings and the related contractual
discounts on these billings. The provision for uncollectible accounts related
to the Amounts Retained by Physicians was 2.5% of Medical Practice Revenues for
the year ended December 31, 1995, compared to 3.1% for the year ended September
30, 1994. The provisions for contractual discounts and uncollectible accounts
reflect the Company's current collection experience.
OTHER REVENUES. Other revenues for the year ended December 31, 1995,
were $8,051,000 compared to $3,270,000 for the year ended September 30, 1994,
representing an increase of $4,781,000, or 146.2%. Other revenues for the year
ended December 31, 1995, were primarily derived from retail pharmacy
operations, revenues derived from research activities performed by the
Company's affiliated physicians that are sponsored by pharmaceutical companies,
and interest income earned from investing excess proceeds from the Company's
initial public offering in 1994 and its second public offering in 1995. Other
revenues for the year ended September 30, 1994, consisted primarily of revenues
generated from retail pharmacy operations and research activity. The Company
operated 21 retail pharmacy locations in certain of its cancer centers and
larger physician offices at December 31, 1995, compared to 10 retail pharmacy
locations at September 30, 1994.
SALARIES AND BENEFITS. Salaries and benefits for the year ended
December 31, 1995, were $37,778,000 compared to $18,866,000 for the year ended
September 30, 1994, representing an increase of $18,912,000, or 100.2%.
Salaries and benefits include costs of clinical nonphysician employees of the
Affiliated Physician Groups paid by the Company pursuant to the terms of the
Service Agreements. The dollar increase in salaries and benefits was due to the
addition of clinical and nonclinical personnel required to support the increase
in Affiliated Physician Groups managed by the
18
<PAGE> 19
Company. Salaries and benefits as a percentage of total revenues were 27.5% for
the year ended December 31, 1995, compared to 31.9% for the year ended
September 30, 1994. This decrease in the percentage of salaries and benefits to
total revenues is due to enhanced services, such as radiation therapy, where
the incremental personnel cost of providing services is less than the revenues
generated. In addition, the Company's incremental cost of administrative
personnel, such as billing and collection personnel, does not increase
proportionately to the increase in revenues as a result of the Company's
increasing use of technologies such as electronic billing and remittances with
certain larger payors.
PHARMACEUTICALS AND SUPPLIES. Pharmaceuticals and supplies for the
year ended December 31, 1995, were $33,605,000 compared to $15,996,000 for the
year ended September 30, 1994, representing an increase of $17,609,000, or
110.1%. The dollar increase in pharmaceuticals and supplies was attributable to
the increase in related infusion, radiation, and diagnostic services generated
by Affiliated Physician Groups, both through the increased number of physicians
and the enhancement of services provided in physician offices and cancer
centers. The percentage of pharmaceuticals and supplies to total revenues was
24.5% for the year ended December 31, 1995, compared to 27.0% for the year
ended September 30, 1994. This decrease was primarily a result of the increased
growth in the radiation therapy services (as compared to chemotherapy infusion
services) provided by the Affiliated Physician Groups. Radiation therapy
services, unlike chemotherapy infusion services, generally do not require
pharmaceuticals in connection with treatments.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the year ended December 31, 1995, were $34,260,000 compared to $14,718,000 for
the year ended September 30, 1994, representing an increase of $19,542,000, or
132.8%. The percentage of general and administrative expenses to total revenues
was 25.0% for the year ended December 31, 1995, compared to 24.8% for the year
ended September 30, 1994. The dollar and percentage increase in general and
administrative expenses was attributable in part to additional costs of
$5,623,000 related to the increase in the number of the Company's leased
service locations, including five cancer centers that were operated under
leases, and increased personal and real property taxes related to all of the
Company's service locations. Purchased services increased $5,858,000 primarily
as a result of outsourcing certain billing and collection functions,
contracting with BUMC to provide services in connection with the acquisition of
BUMC's outpatient oncology business that occurred in August 1994, and
purchasing certain laboratory and other medical services. Other general and
administrative expenses increased $3,745,000 as a result of the increased level
of travel, promotions, and insurance that was required to service the
additional site locations and related Affiliated Physicians Groups. The
provision for uncollectible accounts increased $4,316,000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
year ended December 31, 1995, was $7,653,000 compared to $2,487,000 for the
year ended September 30, 1994, representing an increase of $5,166,000, or
207.7%. The increase in depreciation is attributable to the increased number of
cancer center locations and the related cost of radiation therapy, other
medical equipment, and furniture and office equipment required to operate the
cancer center and other office locations. The increase in amortization expense
resulted from the costs incurred in acquiring additional Service Agreements
with physician groups. These costs are amortized over the term of the related
Service Agreements.
INTEREST. Interest expense for the year ended December 31, 1995, was
$672,000 compared to $1,682,000 for the year ended September 30, 1994,
representing a decrease of $1,010,000, or 60.0%. The decrease in interest
expense was attributable to the payment of amounts outstanding under the
Revolver using the proceeds from the initial public offering in December 1994
and the second public offering in May 1995. The remaining proceeds from these
offerings were used to finance the Company's capital expenditures and costs of
obtaining Service Agreements rather than through borrowings under the Revolver.
19
<PAGE> 20
INCOME TAXES. Income taxes were $9,190,000 for the year ended December
31, 1995, compared to $3,128,000 for the year ended September 30, 1994,
representing an increase of $6,062,000, or 193.8%. Federal income taxes were
provided on the taxable income of the Company at 35%, and state income taxes
were provided using the applicable statutory rates in effect. During the year
ended September 30, 1994, the Company recorded a one-time charge of $1,250,000
as a result of providing deferred taxes on the assets acquired through the
Reorganization.
20
<PAGE> 21
THREE MONTHS ENDED DECEMBER 31, 1994 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1993.
Prior to December 31, 1994, the Company's fiscal year end was
September 30. Effective December 31, 1994, the Company adopted a December 31
fiscal year end. Under applicable Securities and Exchange Commission rules, the
Company is required to compare the three months ended December 31, 1994, to the
three months ended December 31, 1993.
MANAGEMENT FEES. Management Fees were $21,674,000 for the three months
ended December 31, 1994, compared to $11,788,000 for the three months ended
December 31, 1993, representing an increase of $9,886,000 or 83.9%. The growth
in Management Fees was attributable to a $16,961,000 increase in Medical
Practice Revenues generated by Affiliated Physician Groups offset by an
increase in Amounts Retained by Physicians of $6,753,000 and an increase in the
provision for uncollectible accounts of $322,000. The growth in Gross Medical
Revenues during the three months ended December 31, 1994 is due to an increase
in the number of physicians by 60 to 132 at December 31, 1994, from 72 at
December 31, 1993, an increase in the number of service locations from 30 to
40, and the expansion of service provided at existing locations. The increase
over the comparable period of the prior year in the number of physicians is
comprised of 16 medical oncologists, 12 radiation oncologists, 27 diagnostic
radiologists, and 5 other physicians.
Since December 31, 1993, the Company opened five full-service cancer
centers in Texas which include radiation therapy services, including Odessa
(June 1994), Tyler (August 1994), McAllen (August 1994), and Arlington
(December 1994). In addition, the Company assumed the operations of an existing
free-standing cancer center located in McAllen effective July 1, 1994, through
a ten-year lease arrangement, and it acquired certain assets of BUMC relating
to its outpatient oncology business in August 1994.
Amounts Retained by Physicians were 36.0% of Medical Practice Revenues
for the three months ended December 31, 1994, compared to 32.5% of Medical
Practice Revenues for the comparable period in 1993. This increase was a result
of the addition of the affiliated diagnostic radiologists who were practicing
in facilities that were not owned by the Company, and who are generating only
professional charges, 90% of which are retained by TOPA. This increase was
offset in part by additional revenues generated by the Company's new cancer
center operations.
Contractual discounts were 17.8% of Gross Medical Billings for the
three months ended December 31, 1994, compared to 12.9% of Gross Medical
Billings for the comparable period in 1993. The increase in the percentage for
contractual discounts is reflective of the increase in the percentage of the
Company's revenues derived from managed care payors from 10% of Gross Medical
Billings for the three months ended December 31, 1993, to 21% for the three
months ended December 31, 1994. The provision for uncollectible accounts
related to the Amounts Retained by Physician Groups was 2.4% of Medical
Practice Revenues for the three months ended December 31, 1994, compared to
2.9% for the comparable period in 1993. The provisions for contractual
discounts and uncollectible accounts reflect the Company's current collection
experience.
OTHER REVENUES. Other revenues for the three months ended December 31,
1994, were $1,510,000 compared to $281,000 for the three months ended December
31, 1993, representing an increase of $1,229,000, or 437.4%. Other revenues
were primarily derived from retail pharmacy operations located in the Company's
newer cancer treatment centers and certain mature offices and research
activities performed by the Company's affiliated physicians that are sponsored
by certain pharmaceutical companies. The increase in the retail pharmacy
revenues was a result of the increase to 12 in the number of locations as of
December 31, 1994, as compared to 5 as of December 31, 1993.
21
<PAGE> 22
SALARIES AND BENEFITS. Salaries and benefits for the three months
ended December 31, 1994, were $6,750,000 compared to $3,988,000 for the three
months ended December 31, 1993, representing an increase of $2,762,000, or
69.3%. Salaries and benefits include certain employee expenses paid by the
Company pursuant to the terms of the Texas Service Agreement. The dollar
increase in the salaries and benefits is due to the increased number of
clinical and nonclinical personnel required to support the affiliated
physicians which joined TOPA during the period. The percentage of salaries and
benefits to total revenues was 29.1% for the three months ended December 31,
1994, compared to 33.0% for the comparable period in 1993. The decrease in the
percentage is due to the addition of enhanced services, such as radiation
therapy, where the incremental personnel cost of providing services is less
than the revenues generated.
PHARMACEUTICALS AND SUPPLIES. Pharmaceuticals and supplies for the
three months ended December 31, 1994, were $5,674,000 compared to $3,190,000
for the three months ended December 31, 1993, representing an increase of
$2,484,000, or 77.9%. The dollar increase in pharmaceuticals and supplies for
the three months ended December 31, 1994, compared to the prior period is
attributable primarily to the increase in related infusion, radiation, and
diagnostic services generated by affiliated physicians, both through the
increased number of physicians and the enhancement of services provided in the
offices and the cancer centers. The percentage of pharmaceuticals and supplies
to total revenues was 24.5% for the three months ended December 31, 1994,
compared to 26.5% for the three months ended December 31, 1993. The decrease in
the percentage was primarily a result of the increased growth in the radiation
therapy (as compared to chemotherapy infusion services) generated by the
affiliated physicians. Radiation therapy services, unlike chemotherapy infusion
services, generally do not require pharmaceuticals in connection with
treatments.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the three months ended December 31, 1994, were $6,559,000 compared to
$2,951,000 for the three months ended December 31, 1993, representing an
increase of $3,608,000, or 122.3%. The percentage of general and administrative
expenses to total revenues was 28.3% for the three months ended December 31,
1994, compared to 24.5% for the three months ended December 31, 1993. The
dollar and percentage increase in general and administrative expenses is
attributable in part to additional occupancy costs of $840,000 incurred to
support the office locations opened and three of the four cancer centers which
commenced operations during the quarter ended December 31, 1993. These three
cancer centers were constructed by third parties under build-to-suit
arrangements and are being leased under operating lease arrangements. In
addition, maintenance increased in connection with the added capital equipment
required to provide radiation therapy services. Purchased services increased
$1,124,000 primarily as a result of outsourcing certain billing and collection
functions, contracting with BUMC to provide services in connection with the
acquisition of the outpatient oncology business that occurred in August 1994,
and purchasing certain laboratory and other medical services in connection with
certain research studies. Other general and administrative expenses increased
$574,000 as a result of the increased level of travel, promotions, and
insurance that was required to service the additional site locations and
related affiliated physicians. The provision for uncollectible accounts
increased $1,070,000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
three months ended December 31, 1994, was $1,253,000 compared to $512,000 for
the three months ended December 31, 1993, representing an increase of $741,000,
or 144.7%. The increase in depreciation and amortization is attributable to the
five additional cancer centers opened and the two outpatient oncology
operations acquired since December 31, 1993, and the related cost of radiation
therapy and other equipment, as well as furniture and office equipment required
to operate the cancer centers.
INTEREST. Interest expense for the three months ended December 31,
1994, was $604,000 compared to $377,000 for the three months ended December 31,
1993, representing an increase of $227,000 or 60.2%. This increase was
primarily because of increased borrowings to finance construction and capital
equipment purchases and higher interest rates. The Company used the
22
<PAGE> 23
proceeds obtained through the initial public offering in December 1994 to pay
down the amounts outstanding under the Revolver.
INCOME TAXES. Income taxes were $929,000 for the three months ended
December 31, 1994 compared to $1,388,000 for the three months ended December
31, 1993, representing a decrease of $459,000 or 33.1%. During the year ended
September 30, 1994, the Company recorded a one-time charge of $1,250,000 as a
result of providing deferred taxes on the assets acquired from the Predecessor
Entities. Income taxes were provided on the taxable income of the Company for
federal and state reporting purposes at an effective rate of 39%.
SUMMARY OF OPERATIONS BY QUARTER
The following table presents unaudited quarterly operating results for
each of the Company's last eight fiscal quarters. The Company believes that all
necessary adjustments have been included in the amounts stated below to present
fairly the quarterly results when read in conjunction with the Consolidated
Financial Statements. Future quarterly results may fluctuate depending on the
addition of physicians, physician offices, and cancer centers. Results of
operations for any particular quarter are not necessarily indicative of results
of operations for a full year or predictive of future periods.
xxx
<TABLE>
<CAPTION>
1995 QUARTER ENDED 1996 QUARTER ENDED
------------------------------------- -------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenues .................... $26,993 $30,898 $35,236 $44,146 49,710 56,570 62,817 69,222
Income before income taxes ........ 3,406 4,991 6,554 8,354 8,551 9,803 8,028 7,385
Net income ........................ 2,073 3,024 3,965 5,053 5,173 5,976 4,856 4,491
NET INCOME PER SHARE:
Net income (loss) per
common share ...................... .06 .08 .10 .13 .12 .13 .10 .09
Weighted average
shares ................ 35,240 38,772 39,716 43,238 43,472 47,748 49,477 49,500
outstanding (1)
OPERATING DATA:
Medical practice revenues ......... $40,808 $44,538 $50,838 $59,283 64,762 73,056 82,207 84,224
Number of physicians(2) ........... 140 153 183 206 225 240 275 290
Number of full time
physician offices (2) ......... 28 30 36 45 48 53 60 65
Number of cancer centers(2) ....... 9 11 14 14 16 17 17 17
Number of states .................. 1 2 3 5 7 8 9 10
</TABLE>
(1) Per share and share data presented for periods prior to March 31, 1996,
have been restated to reflect a two-for-one stock split that was effected
in the form of a stock dividend on June 10, 1996.
(2) At period end.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated its cash flows from operations,
bank financing, and the sale of securities. The Company's primary cash
requirements are for construction of cancer centers, acquisition of equipment
for the cancer centers and the medical offices, and financing receivables. The
Company has also used cash when acquiring assets from and entering into Service
Agreements with Affiliated Physician Groups.
Net cash provided by operations for the year ended December 31, 1996,
was $1,497,000. Collections of the Company's accounts receivable are an
integral part of the Company's liquidity from operating activities. Under the
terms of the Service Agreements, the Company purchases from the Affiliated
Physician Groups the group's accounts receivable at their estimated fair value.
During 1996, net cash of $44,743,000 was used to purchase accounts receivable.
The increase in net accounts receivable for the year ended December 31, 1996,
was a result of (i) net receivables purchased from Affiliated Physician Groups
at the time of executing a Service Agreement, (ii) the increase in the number
of physicians that affiliated with the Company, (iii) the increase in the
number and type of service locations and the expansion of services since
December 31, 1995, and (iv) the growth in its
23
<PAGE> 24
outstanding accounts receivable balances due to an increase in the aging of
accounts receivable. In May 1996, the Company hired a Vice President-Business
Services to address the aging of accounts receivable and related collection
percentages. In late 1996, a number of changes were implemented with a goal to
improving the Company's billing and collection efforts. In addition, the
Company is in the process of reviewing and selecting software to replace its
current practice management software. Net cash used from operations was
$6,466,000 for the year ended December 31, 1996, as a result of an increase in
amounts due from related parties. These amounts arise primarily from short-term
working capital advances made to Affiliated Physician Groups, particularly for
the development of new markets and as a result of liabilities assumed at the
time of entering into a Service Agreement but that are reimbursable by the
Affiliated Physician Group to the Company. These amounts used by operations
were offset by an increase in accounts payable and accrued liabilities related
to the growth in the Company's business and the related financing of its
expenditures through terms that the Company has negotiated with its vendors.
Net cash used in investing activities for the year ended December 31,
1996, was $86,564,000. During 1996, the Company completed and equipped the El
Paso cancer center that opened in mid-June 1996, a diagnostic imaging center
located adjacent to the Mesquite cancer center that opened in mid-May 1996, and
remodeled and expanded the Plano, Sherman, and Midland cancer centers. The
Company also purchased and commenced operations of an existing free-standing
cancer center in El Paso in April 1996. In January 1996, the Company made the
final payment of approximately $7,200,000 on twelve computerized tomography
scan machines that are installed in various cancer centers. The Company also
purchased land for future development of cancer centers in Eugene, Oregon and
Abilene, Texas, and commenced construction in July on the Abilene cancer
center. In addition, the Company paid approximately $21,131,000 to Affiliated
Physician Groups in Maryland, Arkansas, New York, Minnesota, and Missouri in
connection with entering into Service Agreements. The Company currently has
cancer centers under construction in Abilene, Texas, Austin, Texas, Fort Worth,
Texas, and in Eugene, Oregon. At December 31, 1996, the Company was committed
to approximately $9,100,000 million in capital expenditures related to
construction and equipment acquisition. These expenditures are currently
expected to be funded primarily from borrowings under the Revolver.
Net cash flows from financing activities for the year ended December
31, 1996, were $80,341,000. The Company completed a public offering of
5,380,000 shares of common stock in April 1996 with proceeds to the Company of
$102,470,000. Cumulative borrowings under the Revolver prior to the completion
of the Offering were $59,000,000, of which $36,000,000 was borrowed during
1996, and had been used to finance the Company's operations. The borrowings
under the Revolver were repaid with a portion of the net proceeds from the
April 1996 public offering. The remainder of the net proceeds from the April
1996 public offering were used for capital expenditures, amounts paid to
Affiliated Physician Groups as consideration for entering into Service
Agreements, and for general corporate purposes.
The Revolver currently provides for maximum borrowings of up to $90.0
million (based upon a calculation of the Company's borrowing base). The Company
has the option of financing borrowings under the Revolver at either a
LIBOR-based rate (LIBOR plus 1% at December 31, 1996) or the Prime Rate. The
Revolver also contains covenants that, among other things, require the Company
to maintain certain financial ratios and impose restrictions on the Company's
ability to pay cash dividends, sell assets, and redeem or repurchase Company
securities. At December 31, 1996, no amounts were outstanding under the
Revolver, and the Company had the entire $90.0 million available for borrowing.
However, in January 1997, the Company began borrowing amounts under the
Revolver again, and at March 25, 1997, amounts outstanding under the Revolver
were $21,000,000. In March 1997, the Company received a commitment from Bank
One Texas, N.A., the agent under the Revolver, to amend the current agreement
to increase the maximum amounts available for borrowing from $90.0 million to
$125.0 million, to decrease the interest rate on outstanding balances, and to
amend certain covenants.
24
<PAGE> 25
The Company expects that its principal use of funds in the foreseeable
future will be for the construction of cancer centers and the acquisition of
related equipment; the acquisition of medical practice assets; payments to
Affiliated Physician Groups as consideration for entering into Service
Agreements; repayment of notes issued in connection with the acquisition of
Service Agreements; debt repayments under the Revolver; and working capital.
The Company believes that the unused borrowing capacity under the Revolver will
be sufficient to meet its needs in the near term. Recent declines in the market
price of the Common Stock make offerings of common stock to the public unlikely
in the near-term. The Company believes it has adequate access to other
forms of financing at reasonable terms to meet the capital requirements of its
construction and network development programs through 1998, including but not
limited to increasing the amount available for borrowing under the Revolver.
However, no assurance exists that such additional financing will be available
in the future or that, if available, it will be available on terms acceptable
to the Company. In addition, the Company will continue to construct facilities
under build-to-suit arrangements pursuant to long-term operating leases if the
implicit cost of construction is equal to or less than the cost for the Company
to construct its own facilities.
FORWARD-LOOKING STATEMENTS/RISK FACTORS
This Form 10-K contains certain forward-looking statements regarding
the anticipated financial and operating results of the Company. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company is including the following cautionary statements identifying
important factors that could cause the Company's actual results to differ
materially from those projected in forward-looking statements made by, or on
behalf of, the Company. These factors, many of which are beyond the Company's
control, include the Company's dependence on fees and revenues generated by
physicians employed by the Affiliated Physician Groups, particularly TOPA; the
Company's ability to identify expansion opportunities; the Company's ability
to achieve operating efficiencies associated with integrating physician
practices and expanding the services offered by its Affiliated Physician
Groups; the Company's ability to obtain suitable financing to support its
expansion objectives; changes in governmental regulation of the relationships
between the Company and the Affiliated Physician Groups; changes in payment
for medical services, including Medicare and Medicaid programs; the Company's
ability to provide services on a risk-sharing or capitated basis; competitive
pressures affecting physician practice management companies and physician
groups with whom the Company contracts; diversion of management's attention
from operations to respond to lawsuits against the Company; and potential
exposure to professional and product liability claims. The Company undertakes
no obligation to publicly release any revisions to any forward-looking
statements contained herein to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events.
25
<PAGE> 26
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS PAGE
<S> <C>
Report of Independent Public Accountants 27
Consolidated Balance Sheets as of December 31, 1995 and 1996 28
Consolidated Statements of Income for the Year Ended 30
September 30, 1994, the Three Months
Ended December 31, 1993 (unaudited) and 1994, and
the Years Ended December 31, 1995 and 1996
Consolidated Statements of Stockholders' Equity for the 31
Year Ended September 30, 1994, the
Three Months Ended December 31, 1994, and the
Years Ended December 31, 1995 and 1996
Consolidated Statements of Cash Flows for the Year Ended 32
September 30, 1994, the Three Months
Ended December 31, 1993 (unaudited) and 1994, and
the Years Ended December 31, 1995 and 1996
Notes to Consolidated Financial Statements 33
INDEX TO FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants 46
Schedule II - Reserves for Uncompensated Care 47
For selected quarterly financial data, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Summary of
Operations by Quarter" beginning on page 20 hereof.
</TABLE>
26
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Physician Reliance Network, Inc.:
We have audited the accompanying consolidated balance sheets of Physician
Reliance Network, Inc. (a Texas corporation - Note 1) and subsidiaries as of
December 31, 1995 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year in the period ended September
30, 1994, the three months ended December 31, 1994 and the two years ended
December 31, 1995 and 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Physician Reliance Network,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for the year in the period ended
September 30, 1994, the three months ended December 31, 1994, and the two years
ended December 31, 1995 and 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 10, 1997
27
<PAGE> 28
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1996
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,405 $ 7,679
Accounts receivable, net of allowances of $13,321 and $19,797
at December 31, 1995 and 1996, respectively 49,856 94,599
Due from related parties 2,123 8,589
Other receivables 1,844 1,238
Inventories 3,841 4,481
Prepaid expenses and other 1,965 1,724
Deferred income tax 361 507
--------- ---------
Total current assets 72,395 118,817
--------- ---------
Property and equipment:
Land 9,386 12,493
Buildings 33,502 51,511
Furniture and equipment 66,809 99,162
Construction-in-progress 3,164 7,898
--------- ---------
112,861 171,064
Less - Accumulated depreciation (16,310) (29,394)
--------- ---------
Net property and equipment 96,551 141,670
--------- ---------
Investments 1,997 1,734
Service agreements, net of accumulated amortization of $459
and $2,387 at December 31, 1995 and 1996, respectively 29,188 86,383
Other assets, net 4,502 6,737
--------- ---------
Total assets $204,633 $355,341
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
28
<PAGE> 29
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1996
--------- ---------
<S> <C> <C>
Current liabilities:
Accounts payable $ 10,206 $ 21,400
Accrued liabilities-
Salaries and benefits 2,850 4,739
Property taxes 695 1,283
Other 2,080 1,870
--------- ---------
5,625 7,892
Due to related party 1,105 6,060
Federal income tax 960 --
Current maturities of long-term debt 1,873 4,696
--------- ---------
Total current liabilities 19,769 40,048
Long-term debt, net of current maturities 26,973 14,121
Construction and retainage payable 7,505 540
Deferred income taxes 4,652 5,856
--------- ---------
Total liabilities 58,899 60,565
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, $.01 stated value per
share, 50,000,000 and 150,000,000 shares authorized,
respectively, 41,708,390 and 47,630,820 shares issued
at December 31, 1995 and 1996, respectively, and 46,350
shares subscribed at December 31, 1995 417 476
Additional paid-in capital 121,885 230,024
Common stock to be issued, 2,026,574 shares 6,814 26,962
Retained earnings 16,818 37,314
--------- ---------
145,934 294,776
Less- Subscription receivable (200) --
--------- ---------
Total stockholders' equity 145,734 294,776
--------- ---------
Total liabilities and stockholders' equity $204,633 $355,341
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
29
<PAGE> 30
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended Three Months Ended Years Ended
September 30, December 31, December 31,
------------- -------------------- --------------------
1994 1993 1994 1995 1996
-------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Medical practice revenues, net $ 86,313 $ 17,707 $ 34,346 $190,664 $296,907
Amounts retained by physicians (30,343) (5,919) (12,672) (61,442) (72,414)
-------- -------- -------- -------- --------
Management Fees 55,970 11,788 21,674 129,222 224,493
Other revenues 3,270 281 1,510 8,051 13,826
-------- -------- -------- -------- --------
Total revenues 59,240 12,069 23,184 137,273 238,319
-------- -------- -------- -------- --------
Costs and expenses:
Salaries and benefits 18,866 3,988 6,750 37,778 66,879
Pharmaceuticals and supplies 15,996 3,190 5,674 33,605 70,822
General and administrative 14,718 2,951 6,559 34,260 49,018
Depreciation and amortization 2,487 512 1,253 7,653 15,894
Interest expense 1,682 377 604 672 1,939
-------- -------- -------- -------- --------
Total costs and expenses 53,749 11,018 20,840 113,968 204,552
-------- -------- -------- -------- --------
Income before taxes and extraordinary item 5,491 1,051 2,344 23,305 33,767
Provision (benefit) for income taxes:
Current 3,914 758 951 4,006 12,213
Deferred (2,036) (620) (22) 5,184 1,058
Deferred reorganization 1,250 1,250 -- -- --
-------- -------- -------- -------- --------
Total provision for income taxes 3,128 1,388 929 9,190 13,271
-------- -------- -------- -------- --------
Income before extraordinary item 2,363 (337) 1,415 14,115 20,496
Extraordinary item, early retirement of debt,
net of deferred tax benefit of $156 (302) -- -- -- --
Net income (loss) $ 2,061 $ (337) $ 1,415 $ 14,115 $ 20,496
======== ======== ======== ======== ========
Net income (loss) per common share (primary and
fully diluted):
Net income (loss) before extraordinary item $ 0.08 $ (.01) $ 0.04 $ 0.34 $ 0.43
Extraordinary item (0.01) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) per common
share $ 0.07 $ (.01) $ 0.04 $ 0.34 $ 0.43
======== ======== ======== ======== ========
Weighted average shares outstanding (000s) 29,166 25,488 32,056 41,072 47,625
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
30
<PAGE> 31
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK
SUBSCRIPTION ADDITIONAL PREDECESSOR COMMON RETAINED COMMON TOTAL
SHARES AMOUNT PAID-IN OWNERS' STOCK TO EARNINGS STOCK STOCKHOLDERS'
RECEIVABLE TOTAL CAPITAL EQUITY BE ISSUED (DEFICIT) SUBSCRIBED EQUITY
---------- ------- ---------- ------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1993 13,128,902 $ 131 $ (192) $ 9,487 $ -- $ (773) $ -- $ 8,653
Effect of reorganization
(Note 1)-
Exchange of
common stock 7,261,548 73 4,595 (4,632) -- -- -- 36
Amounts retained
by predecessor
owners -- -- -- (4,855) -- -- -- (4,855)
Issuance of common
stock 42,478 -- 100 -- -- -- -- 100
Common stock
subscribed 1,529,284 15 6,585 -- -- -- (6,600) --
Net income -- -- -- -- -- 2,061 -- 2,061
---------- ------- ---------- ------- ---------- ---------- ------- ----------
Balance,
September 30, 1994 21,962,212 219 11,088 -- -- 1,288 (6,600) 5,995
Conversion of
mandatorily
redeemable
convertible
preferred stock 8,156,178 82 24,318 -- -- -- -- 24,400
Issuance of common
stock 7,590,000 76 48,736 -- -- -- -- 48,812
Net income -- -- -- -- -- 1,415 -- 1,415
---------- ------- ---------- ------- ---------- ---------- ------- ----------
Balance,
December 31, 1994 37,708,390 377 84,142 -- -- 2,703 (6,600) 80,622
Issuance of common
stock 4,000,000 40 37,743 -- -- -- -- 37,783
Common stock
to be issued -- -- -- -- 6,814 -- -- 6,814
Net income -- -- -- -- -- 14,115 -- 14,115
Payment on
common stock
subscribed -- -- -- -- -- -- 6,400 6,400
---------- ------- ---------- ------- ---------- ---------- ------- ----------
Balance,
December 31, 1995 41,708,390 417 121,885 -- 6,814 16,818 (200) 145,734
Issuance of common
stock 5,922,430 59 108,139 -- (1,602) -- -- 106,596
Common stock
to be issued -- -- -- -- 21,750 -- -- 21,750
Net income -- -- -- -- -- 20,496 -- 20,496
Payment on
common stock
subscribed -- -- -- -- -- -- 200 200
---------- ------- ---------- ------- ---------- ---------- ------- ----------
Balance,
December 31, 1996 47,630,820 $ 476 $ 230,024 $ -- $ 26,962 $ 37,314 $ -- $ 294,776
========== ======= ========== ======= ========== ========== ======= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
31
<PAGE> 32
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------- ------------------ ------------
1994 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,061 $ (337) $ 1,415 $ 14,115 $ 20,496
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization 2,487 512 1,306 7,810 15,894
Deferred income taxes, net (3,045) (871) (27) 5,104 1,058
Undistributed earnings of investments 6 (10) 23 9 --
Extraordinary item 302 -- -- -- --
Changes in operating assets and liabilities-
(Increase) decrease in accounts receivable, net (8,939) 2,253 (4,993) (28,888) (44,743)
(Increase) decrease in other receivables (628) 115 786 30 (5,860)
Increase in inventories and prepaids (1,905) (1,355) (217) (3,449) (294)
(Increase) decrease in other assets (3,521) 14 63 (174) (2,510)
Increase (decrease) in accounts payable
and accrued liabilities 1,557 (2,673) (575) 8,449 12,501
Increase (decrease) in due to related
party 4,679 3,742 (1,333) (2,241) 4,955
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities (6,946) 1,390 (3,552) 765 1,497
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures (23,714) (1,415) (7,369) (49,572) (58,203)
Construction and retainage 1,766 140 3,377 2,362 (6,966)
Service agreements -- -- -- (13,627) (21,131)
Other -- -- -- (1,744) (264)
--------- --------- --------- --------- ---------
Net cash used in investing
activities (21,948) (1,275) (3,992) (62,581) (86,564)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 41,836 1,632 1,863 30,731 36,000
Payments on long-term borrowings (25,307) (488) (40,701) (9,978) (58,329)
Long-term debt issuance costs (1,155) -- -- --
Issuance of common stock 100 -- 48,812 36,570 102,470
Proceeds from subscription receivable -- -- -- 6,400 200
Issuance of mandatorily redeemable preferred stock 24,400 10,000 -- -- --
Amounts retained by predecessor owners (4,855) (4,855) -- -- --
Other 8 (23) -- -- --
--------- --------- --------- --------- ---------
Net cash provided by financing
activities 35,027 6,266 9,974 63,723 80,341
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 6,133 6,381 2,430 1,907 (4,726)
Cash and cash equivalents, beginning of period 1,935 1,935 8,068 10,498 12,405
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period $ 8,068 $ 8,316 $ 10,498 $ 12,405 $ 7,679
========= ========= ========= ========= =========
Cash paid during the period:
Interest, net of amount capitalized $ 1,591 $ 361 $ 280 $ 330 $ 1,561
Income taxes 2,669 -- 1,000 4,069 7,355
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
32
<PAGE> 33
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except share and per share information)
1. ORGANIZATION:
General
Physician Reliance Network, Inc. ("PRN" or the "Company") was formed by
Texas Oncology P.A. (TOPA) on July 1, 1993. Concurrently, PRN acquired Texas
Oncology Pharmacy Services, Inc. (TOPS) from TOPA by exchanging 6,372,016
shares of PRN common stock for all the capital stock of TOPS. TOPA also
purchased 6,756,886 shares of PRN common stock at its stated value of $.01 per
share.
In October 1993, TOPA and PRN effected a reorganization (the
"Reorganization") in which PRN acquired the remaining affiliated entities of
TOPA through an exchange of 7,261,550 shares of PRN common stock. In the
Reorganization, PRN acquired the ownership interests in affiliated limited and
general partnerships ("Partnerships") and North Texas Oncology Centers, Inc.
(NTOC), which collectively are referred to as the "Predecessor Entities." The
Partnerships and NTOC owned land, facilities, and equipment used by and leased
to TOPA. TOPA served as the general partner of each of these entities, and the
limited partners were comprised of certain TOPA physician and management
employees.
Change in Year-End
Effective December 31, 1994, the Company adopted a December 31 calendar
year-end. The accompanying consolidated financial statements include audited
financial statements for the three-month transition period ended December 31,
1994 ("Transition Period"). Audited financial statements are also presented for
the three fiscal years ended September 30, 1994, and December 31, 1995 and
1996. Unaudited financial statements are presented for the three-month period
ended December 31, 1993, for comparative purposes only.
Service Agreements
The Company enters into service agreements (the "Service Agreements") with
physician groups (the "Affiliated Physician Groups"). Under the Service
Agreements, the Company is the sole and exclusive manager of all day-to-day
business functions of the Affiliated Physician Groups providing facilities,
equipment, supplies, support personnel, and management and financial advisory
services. In return, the Company receives a monthly fee. The initial terms of
the Service Agreements generally are between 30 and 40 years with automatic
five-year extensions thereafter unless either party gives notice not to renew
to the other prior to the expiration term. The Service Agreements generally are
not terminable earlier by the Affiliated Physician Groups except in the event
of the Company's bankruptcy or material breach of the Service Agreement.
33
<PAGE> 34
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of PRN and its
subsidiaries for the Transition Period and for the years ended September 30,
1994, and December 31, 1995 and 1996. All significant intercompany transactions
have been eliminated. Certain prior period amounts have been reclassified to
conform with the current year presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash and cash equivalents.
On October 1, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Instruments in Debt and
Equity Securities" ("SFAS 115"). In accordance with SFAS 115, the Company's
debt securities are considered available for sale. Available-for-sale
securities represent those securities that do not meet the classification of
held-to-maturity, are not actively traded, and are carried at fair value.
Unrealized gains and losses on these securities are excluded from earnings and
are reported as a separate component of stockholders' equity, net of applicable
taxes, until realized. As of December 31, 1996, the Company had no investments
in debt securities. In 1995, the Company recorded $384 in realized gains and
$47 in realized losses. No realized gains or losses were recorded in 1996.
Accounts Receivable
Accounts receivable represent receivables from patients and other
third-party payors for medical services provided by the Affiliated Physician
Groups. Under the terms of the Service Agreements, the Company purchases the
accounts receivable outstanding at the end of each month from the Affiliated
Physician Groups, net of estimated allowances. Therefore, accounts receivable
are a function of medical practice revenues rather than the management fee
earned by the Company ("Management Fee").
Accounts receivable are stated net of an allowance for uncollectibles,
which is charged to operations or to the Affiliated Physician Group under
Service Agreements, as appropriate, based on an evaluation of potential losses.
Due from Related Parties
The Company has advanced to its Affiliated Physician Groups amounts needed
for working capital purposes primarily to assist with the development of new
markets. The advances bear interest at a rate negotiated by the Company and the
Affiliated Physician Groups (8.25% at December 31, 1996).
Inventories
Inventories consist of pharmaceuticals and medical supplies and are
carried at the lower of cost or market on a first-in, first-out basis.
Property and Equipment
34
<PAGE> 35
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over estimated useful lives generally, 25 years for
buildings, and ranging from 3 to 10 years for furniture and equipment.
Maintenance costs and repairs are expensed as incurred. Interest costs incurred
during the construction of major capital additions are capitalized as property.
The Company capitalized interest costs of approximately $544, $17, and $78 for
the years ended September 30, 1994, and December 31, 1995 and 1996
respectively, and $16 for the Transition Period. No interest was capitalized
for the three months ended December 31, 1993.
Management Service Agreements
The Company pays certain Affiliated Physician Groups amounts as
consideration for entering into a Service Agreement. These costs are amortized
over the initial term of the related Service Agreement.
The Emerging Issues Task Force of the Financial Accounting Standards Board
is currently evaluating certain matters relating to the physician practice
management industry, which the Company expects will include a review of the
consolidation of professional corporation revenues and the accounting for
businesses combinations. The Company is unable to predict the impact, if any,
that this review may have on the Company's acquisition strategy, allocation of
purchase price related to acquisitions, and amortization life assigned to
intangible assets,
Other Assets
Other assets consist primarily of deferred financing costs and the excess
of purchase price over the fair value of net assets acquired. The excess of
purchase price over the fair value of net assets acquired is being amortized on
a straight-line basis over 20 years. The carrying value of excess of cost over
fair value of assets acquired is reviewed if the facts and circumstances
suggest that it may be impaired. If this review indicates that excess of cost
over fair value of assets acquired will not be recoverable, as determined based
on the discounted cash flows of the entity acquired over the remaining
amortization period, the carrying value of the excess of cost over fair value
of assets acquired is reduced by the estimated shortfall of cash flows.
Deferred financing costs, which consist of costs incurred in obtaining debt
financing, are amortized using the straight-line method over the term of the
related debt, and such amortization is included in interest expense.
Construction and Retainage Payable
Construction and retainage payable are reflected as long-term liabilities
since these costs are expected to be financed with long-term debt.
Medical Practice Revenues, Net
Medical practice revenues, net represent the revenue of the Affiliated
Physician Groups reported at the estimated realizable amounts from third-party
payors and patients for services rendered, net of contractual and other
adjustments. Revenue under certain third-party payor agreements is subject to
audit and retroactive adjustments. No material claims, disputes, or other
unsettled matters exist to management's knowledge concerning third-party
reimbursements.
During the fiscal year ended September 30, 1994, and the years ended
December 31, 1995 and 1996, the Company estimates that approximately 40%, 45%,
and 50%, respectively, of Medical Practice Revenues, net was received from
payments made by government-sponsored health care programs (principally,
Medicare and Medicaid), and 40% for the Transition Period.
Management Fee Revenues
Management Fee Revenue represents the revenue from Medical Practice
Revenues, net less amounts retained by physicians. The amounts retained by
physicians represents the portion of revenues contractually retained by
Affiliated Physician Groups under Service Agreements and are used by the
Affiliated Physician Groups to provide physician salaries, benefits,
malpractice, and other expenses incidental to their practice.
35
<PAGE> 36
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred taxes arise
primarily from the recognition of revenues and expenses in different periods
for income tax and financial reporting purposes.
Net Income (Loss) Per Common Share
Net income (loss) per common share has been computed by dividing net
income by the weighted average number of common and common equivalent shares
outstanding during the period. Common stock equivalent shares consist of the
dilutive effect of outstanding options calculated using the treasury stock
method and mandatorily redeemable convertible preferred stock and are treated
as outstanding for the entire period.
Financial Instruments
On January 1, 1995, the Company adopted SFAS No. 107, "Disclosure about
Fair Value of Financial Instruments". Cash and cash equivalent, accounts
receivable, and accounts payable and accrued liabilities are reflected in the
consolidated financial statements at fair value because of the short-term
maturity of those instruments. The fair value of long-term debt at December 31,
1996, was $19,510 compared to its carrying value of $18,817 and at December 31,
1995, was $29,277 compared to its carrying value of $28,858. The fair value of
long-term debt was determined using the Company's incremental borrowing rate
under the Company's revolving credit facility (the "Revolver") at December 31,
1996 (6.5%).
Long-Lived Assets
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of." Under SFAS No. 121, the
amounts recorded by the Company for Property and Equipment, Service Agreements,
and Other Assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If this review indicates that the carrying amounts of an asset may
not be recoverable, as determined based on the undiscounted cash flows of the
operations acquired over the remaining amortization period, the carrying value
of the asset is reduced to fair value. Among the factors that the Company will
continually evaluate are unfavorable changes in each of the geographic markets
in which the Company has entered into Service Agreements including the relative
market share and competitive environment, current period and forecasted
operating and cash flow levels from the Company's Service Agreements, and legal
and regulatory factors governing the practice of medicine.
36
<PAGE> 37
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Supplemental Cash Flow Information
Supplemental schedule of noncash investing and financing activities are as
follows:
During 1994, the Company sold common stock with a value of $6,600 to TOPA
in exchange for a promissory note from TOPA.
During 1995, the Company acquired $8,087 in assets in exchange for notes
payable of $60 and a commitment to issue $8,027 of common stock in connection
with the execution of Service Agreements.
During 1996, the Company acquired $37,589 in assets in exchange for $3,801
of common stock, notes payable of $12,037, and a commitment to issue $21,751 of
common stock in connection with the execution of Service Agreements.
3. THE BAYLOR TRANSACTION:
Effective August 1, 1994, the Company acquired the outpatient oncology
operations and related equipment of Baylor University Medical Center (BUMC) for
$6,400. As part of this transaction, the Company recorded Other Assets of
$2,950 of the excess of purchase price over the fair value of net assets
acquired. The purchase of the outpatient oncology operations was effected in
two phases - the majority of the outpatient oncology operations were
transferred to the Company effective August 1, 1994, with the remainder,
primarily the bone marrow transplant operations, being transferred on January
1, 1995. In addition, the Company leased the majority of the Sammons Cancer
Center and space in the Collins Hospital building, occupying space in phases of
approximately six-month increments between August 1, 1994, and January 1, 1996.
The effective term of the lease is eleven and one-half years, with two
five-year renewal options.
4. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
DESCRIPTION 1995 1996
- ------------------------------------------------------------ -------- ---------
<S> <C> <C>
Credit Facility bearing interest at prime (8.5% and 8.25% at
December 31, 1995 and 1996 respectively) or LIBOR (5.75% and
5.5% at December 31, 1995 and 1996, respectively)
plus 1%, maturing in 2000, and secured by substantially
all assets of the Company $ 20,000 $ --
Notes payable bearing interest at rates ranging from 8%
to 10%, maturing between 1999 to 2005 8,846 18,817
-------- --------
Total 28,846 18,817
Less-current maturities (1,873) (4,696)
-------- --------
Long-term debt $ 26,973 $ 14,121
======== ========
</TABLE>
37
<PAGE> 38
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Effective December 31, 1995, the Company amended the Revolver. The
amendment, among other things, increased the amounts available for borrowing
under the Revolver from $60 million to $90 million and reduced the interest
rate charged on borrowings. The Revolver matures December 31, 2000 and is
secured by substantially all of the assets of the Company. The Revolver
contains covenants that, among other things, requires the Company to maintain
certain financial ratios and imposes restrictions on the Company's ability to
incur future indebtedness, pay dividends, sell assets, or redeem or repurchase
Company securities.
As of December 31, 1996, the maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1997 $ 4,696
1998 5,207
1999 5,186
2000 3,148
2001 105
Thereafter 475
============
$18,817
============
</TABLE>
5. LEASES:
The Company leases certain facilities and equipment under operating
leases. Generally, real estate leases are for primary terms of 1 to 15 years
with options to renew for additional periods, and equipment leases are for
terms of 1 to 4 years.
Future commitments under noncancelable operating leases as of December 31,
1996, are as follows:
<TABLE>
<S> <C>
1997 $11,495
1998 10,846
1999 10,113
2000 9,299
2001 8,013
Thereafter 31,854
-------
$81,620
</TABLE>
Rent expense was $2,809, $6,685, and $11,252 for the years ended September
30, 1994, and December 31, 1995 and 1996 respectively, and $1,215 for the
Transition Period.
6. COMMITMENTS AND CONTINGENCIES:
The Company enters into commitments with various construction companies
and equipment vendors in connection with the development of cancer centers. As
of December 31, 1996, the Company's commitments were approximately $9,100.
The provision of medical services and the conduct of clinical trials
by physician groups with which the Company contracts entail an inherent risk of
professional liability claims. The Company does not control the practice of
medicine by physicians or the employee with certain regulatory and other
requirements directly applicable to physicians and physician groups. Because
the company purchases and resells pharmaceutical products and related medical
supplies, it faces the risk of product liability claims. Although the Company
has not been a party to any claims, suits, or complaints relating to services
and products provided by the Company or physicians to whom the Company provides
services, there can be no assurance that such claims will not be asserted
against the Company in the future. The Company maintains insurance coverage
that it believes to be adequate both as to risks and amounts. In addition,
pursuant to the Service Agreements, the Affiliated Physician Groups are
required to maintain comprehensive professional liability insurance. Successful
malpractice claims asserted against Affiliated Physician Groups or the Company
could, however, have a material adverse effect on the Company.
("Methodist") filed a lawsuit in the District Court of Dallas County,
Texas against the Company and TOPA. This lawsuit asserts various claims,
including claims of monopolization, conspiracy to monopolize, attempted
monopolization, unfair competition, and tortious interference with actual and
prospective contractual relationships. Methodist seeks both injunctive relief
and unspecified monetary and punitive damages. This matter is set for trial in
November 1997. The Company has denied each of Methodist's claims, believes this
lawsuit is without merit, and intends to vigorously defend itself. The Company
is not aware of any governmental actions to assert claims against TOPA or the
Company similar to those asserted by Methodist.
On or about September 12, 1996, the Company was named as a defendant
in a suit styled "Alan Hinerfeld On Behalf of Himself and All Others Similarly
Situated v. Physician Reliance Network, Inc., Merrick H. Reese, Joseph S.
Bailes, Randall D. Kurtz, Robert W. Daly, Robert J. Whren, Merrill Lynch,
Pierce Fenner & Smith, Inc., Smith Barney, Inc., Piper Jaffray Inc., and Cowen
and Company, in the 14th Judicial District Court, Dallas County, Texas
("Hinerfeld"). On or about September 17, 1996, the Company was named as a
defendant in a suit styled Susan Kaufman On Behalf of Herself and All Others
Similarly Situated v. Physician Reliance Network, Inc., Texas Oncology, P.A.,
Merrick H. Reese, Joseph S. Bailes, J. Ernest Sims, Pamela Burgess, Randall D.
Kurtz, Robert W. Daly and Robert J. Whren in the United States District Court
for the Northern District of Texas, Dallas Division ("Kaufman"). On or about
October 15, 1996, the Company was named as a defendant in a suit styled Robert
N. Abendschein, On Behalf of Himself and All Others Similarly Situated v.
Physician Reliance Network, Inc., Texas Oncology, P.A., Merrick H. Reese, Joseph
S. Bailes, Randall D. Kurtz, J. Ernest Sims, Robert J. Whren, Robert W. Daly and
Pamela Burgess, in the 134th Judicial District Court, Dallas County, Texas
("Abendschein"). By order dated December 16, 1996, the Abendschein case was
consolidated with the Hinerfeld action. On or about March 3, 1997, the
Abendschein state court suit was dismissed without prejudice, and on or about
March 11, 1997, plaintiff Abendschein joined the Kaufman Federal court suit.
Pamela Burgess is no longer a named defendant in the Kaufman action. Kaufman
seeks recovery on behalf of all persons who purchased shares of the Company's
common stock on the open market from February 12, 1996, to July 11, 1996, and
alleges claims under Sections 10b and 20(a) of the Federal Securities Exchange
Act of 1934, and under Rule 10b-5 promulgated thereunder. Hinerfeld seeks
recovery on behalf of persons who purchased stock between April 23, 1996 and
July 11, 1996, in the April 1996 public offering of the Company's common stock
and alleges claims under Sections 11,12(a)(2) and 15 of the Federal Securities
Act of 1933 and the Texas Securities Revised Civil Statutes Section 581-33. As
relief, Kaufman asserts that, if a class is certified, damages will exceed
$64,482. Hinerfeld seeks unspecified monetary damages.
On September 4, 1996, the Company was named as a defendant in a
similar suit styled, Charles J. Jackson v. Physician Reliance Network, Inc.,
Texas Oncology, P.A.; Smith Barney, Inc.; Cowen & Co., Inc.; Merrill Lynch,
Pierce Fenner & Smith, Inc.; Piper Jaffray, Inc.; Merrick H. Reese, M.D.,
Individually; Joseph S. Bailes, M.D., Individually; and J. Ernest Sims,
Individually, in the 214th Judicial District court, Nueces County, Texas
("Jackson"). Through an amended pleading, Jackson purports to represent a class
of all persons who purchased and presently own shares of the Company's common
stock from November 1994 through September 4, 1996. Jackson asserts claims under
Sections 11 and 15 of the federal Securities Act and the Texas Securities Act.
J. Ernest Sims is no longer a named defendant in the Jackson action, but Randall
D. Kurtz has been named as a defendant. As relief, Jackson seeks $1 plus
interest thereon as his costs for purchasing the Company's common stock. Jackson
seeks unspecified monetary damages on behalf of the class. Responsive pleadings
have been filed, plaintiffs have moved for class certification, and discovery
has commenced in all three suits. In general, Jackson, Kaufman, and Hinerfeld
assert that the Company has engaged in certain improper accounting practices,
that the relationship between the Company and certain of the Affiliated
Physician Groups violates Federal and state law, and that certain of the
Affiliated Physician Groups have charged the Medicare program amounts in excess
of the cost of delivering certain services. The Company believes that the
lawsuits are without merit and intends to vigorously defend itself. The Company
is not aware of any governmental actions to assert claims against TOPA or the
company similar to those in this litigation.
38
<PAGE> 39
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. INCOME TAXES:
The provision for income taxes for the years ended September 30, 1994,
the Transition Period, and the years ended December 31, 1995 and 1996 consisted
of the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------- ------------ ---------------------------
1994 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current:
Federal $ 3,471 $ 921 $ 3,705 $ 10,869
State 443 30 301 1,344
Deferred:
Federal (1,792) (18) 4,436 876
Reorganization 1,250 -- -- --
State (244) (4) 748 182
------------ ------------ ------------ ------------
Total $ 3,128 $ 929 $ 9,190 $ 13,271
============ ============ ============ ============
</TABLE>
A reconciliation between reported income tax expense and the amount
computed by applying the statutory Federal income tax rate of 34% for the year
ended September 30, 1994, the Transition Period, and the years ended December
31, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------ ------------ ------------ ------------
1994 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Computed tax expense $ 1,867 $ 798 $ 7,924 $ 11,481
State taxes 199 106 1,049 1,520
Incremental federal tax rate -- -- 234 338
Use of net operating loss carry forward (223) -- -- --
Effect of the Reorganization 1,250 -- -- --
Other, net 35 25 (17) (68)
============ ============ ============ ============
Total $ 3,128 $ 929 $ 9,190 $ 13,271
============ ============ ============ ============
</TABLE>
39
<PAGE> 40
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of deferred income tax expense (benefit) for the year ended
September 30, 1994, the Transition Period, and the years ended December 31,
1995 and 1996 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------- ------------- ----------------------------
1994 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts (2,114) (132) 2,247 (37)
Expenses incurred in connection with the
Reorganization (192) 37 149 (132)
Effect of the Reorganization 1,250 -- -- --
Property and equipment 270 65 2,995 568
Management service agreement and other
asset amortization -- 8 154 804
Accrued Vacation -- -- (361) (145)
============ ============ ============ ============
$ (786) $ (22) $ 5,184 $ 1,058
============ ============ ============ ============
</TABLE>
The tax effects of temporary differences that give rise to the deferred
tax assets and liabilities at December 31, 1995 and 1996, are presented below:
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets-
Accrued Vacation $ 361 $ 507
-------- --------
Deferred tax liabilities-
Property and equipment (4,502) (5,029)
Service Agreements and other assets (162) (954)
Reorganization expenses and other 12 127
-------- --------
Total deferred tax liabilities (4,652) (5,856)
======== ========
Net deferred tax assets (liabilities) $ (4,291) $ (5,349)
======== ========
</TABLE>
Deferred income taxes were not provided by the Predecessor Entities for
the difference between the basis of their assets for financial reporting and
income tax purposes since the related partners and shareholders of the
Predecessor Entities were individually responsible for the income taxes. In
October 1993, the Company recognized a one-time charge of $1,250 to establish
deferred taxes on the assets that were acquired in the Reorganization.
40
<PAGE> 41
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. PROFIT SHARING PLAN:
Employees of the Company and of the Affiliated Physician Groups
participate in an affiliated service group 401-K and profit sharing and savings
plan (the "Plan"). All employees are eligible to participate in the Plan after
they have been employed six months and reached the age of 20 and 1/2 years.
Employees vest in the employer contribution portion of their account at the
rate of 20% for each year that they meet the Plan's service requirements.
The Plan was amended effective January 1, 1995, to allow for an employer
match of contributions made by plan participants. The Company has elected to
match 50% of employee contributions up to 6% of the participant's salary
subject to the salary ceiling rules imposed by the Internal Revenue Service.
The employer contribution amounted to $304 and $744 for the years ended
December 31, 1995 and 1996, respectively. Prior to 1995, the amounts
contributed to the Plan were discretionary and determined each year by the
board of directors. Employer contributions were $408 for the year ended
September 30, 1994, and $119 for the Transition Period.
9. STOCK OPTION PLANS:
In November 1993, the Company established a stock option plan for
employees ("Employee Option Plan") whereby the Company may issue to officers
and key employees options to purchase up to 3,274,402 shares of the Company's
common stock.
All options have been issued at exercise prices equal to fair market value
of the underlying common stock at the date of grant. Substantially all of the
options that were issued in 1994 vested in May 1996 and may be exercised for a
three-year period thereafter. All subsequent issuances of options vest over
four or five years beginning one year from the date of grant and expire in ten
years. Prior to the Company's initial public offering the Board of Directors
considered, among other things, available operating results of the Company,
comparable public companies' price/earnings ratios, the illiquidity of the
underlying security, and prior transactions in the common stock in establishing
the fair market value of the common stock at the dates of grant.
On November 13, 1996, the Compensation Committee of the Board of Directors
repriced all options outstanding under the Employee Option Plan, other than
options held by the President and the Executive Vice President-Medical Director
granted after the date of the Company's initial public offering. Options issued
at that date under the Employee Option Plan totaled 1,114,100 shares and had
exercise prices ranging between $9.125 and $26.125 per share. The option
exercise prices were amended to be equal to the fair market value of the Common
Stock at the close of business on November 13, 1996, or $6.5625 per share.
In April 1994, the Company established a stock option plan for outside
directors (the "Director Option Plan") whereby the Company may issue to outside
directors options to purchase up to 637,200 shares of the Company's common
stock. On September 22, 1994, the Company granted options to purchase an
aggregate of 114,696 shares of common stock to four outside directors, at an
exercise price of $4.315 per share. In May 1995, the Company granted options to
purchase 5,096 shares of common stock to one outside director at an exercise
price of $9.38 per share. In May 1996, the Company granted options to purchase
an aggregate of 20,384 shares of common stock to three outside directors at an
exercise price of $22.06 per share. Such options vest and are exercisable one
year from the date of grant.
The Company also granted in April 1994 options ("1994 Director Options")
to purchase an aggregate of 76,464 shares of common stock to three directors
at an exercise price of $2.355 per share, which options vested on the date of
grant. These options were not granted pursuant to the Director Option Plan.
41
<PAGE> 42
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The following table summarizes the combined activity under the Employee
Option Plan, the Director Option Plan, and the 1994 Director Options.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
YEAR ENDED 3 MONTHS ENDED -----------------------------------------
SEPTEMBER 30, 1994 DECEMBER 31, 1994 1995 1996
-------------------- -------------------- ------------------- --------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
---------- --------- --------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period -- $ -- 674,002 $2.87 546,562 $ 2.99 1,338,252 $58.75
Granted:
Price is equal to fair value 674,002 2.87 -- -- 800,096 12.61 1,288,484 10.43
Options exercised -- -- -- -- -- -- (136,640) 3.11
Options cancelled -- -- (127,440) 2.36 (8,406) 2.36 (955,400) 14.97
Outstanding, end of period 674,002 2.87 546,562 2.99 1,338,252 8.75 1,534,696 $ 6.79
Exercisable, end of period -- -- -- -- 235,764 -- 480,160 --
Available for grant, end of period 1,317,064 1,317,064 516,537 -- 1,228,053 --
Weighted average fair value 1.35 1.35 7.08 4.62
</TABLE>
Significant option groups outstanding at December 31, 1996, and related
weighted average price and life are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------- -----------------------------------------
Range of Shares Number
Exercise Prices Outstanding at Remaining Weighted Average Exercisable at Weighted-Average
December 31, 1996 Contractual Life Exercise Price December 31, 1996 Exercise Price
- ----------------- -------------------- ----------------- ------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
$ 2.36-4.32 415,616 7.11 $ 3.20 313,664 $ 3.23
6.56-9.63 938,696 9.09 6.81 126,496 7.17
9.88-17.75 160,000 8.49 13.81 40,000 13.81
22.31 20,384 9.35 22.31 -- --
$ 2.36-22.31 1,534,696 8.49 $ 6.79 480,160 $ 5.15
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Sholes option-pricing model with the following weighted average
assumptions for grants in the year ended September 30, 1994, and the years
ended December 31, 1995 and 1996: expected volatility of 57 percent, risk free
interest rates ranging from 4.64 to 7.60 percent, and expected lives of 2.8,
5.0, and 6.0 years for automatic, 4-year, and 5-year vesting options,
respectively.
The Company continues to account for stock based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," as allowed by SFAS No. 123. Had compensation cost for those plans
been determined consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1995 1996
------- -------
<S> <C> <C>
Net income
As reported $14,115 $20,496
Pro forma 13,781 19,257
Earnings per common share
As reported $ 0.34 $ 0.43
Pro forma 0.34 0.40
</TABLE>
42
<PAGE> 43
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY:
The Company sold 1,529,284 shares of common stock to TOPA for $4.315 per
share in consideration of a promissory note from TOPA on September 15, 1994.
The note bore interest at prime plus .625%, and interest was due quarterly
commencing on December 31, 1994. The shares are shown as common stock
subscribed and a subscription receivable in the accompanying consolidated
financial statements. TOPA repaid $6,400 of the subscription receivable in May
1995 and repaid the remaining $200 outstanding in December 1996.
In December 1994, the Company consummated its initial public offering of
7,590,000 shares of common stock. Proceeds from the initial public offering
were $48,812, which was net of commissions and expenses of $4,319. The proceeds
were used to repay amounts outstanding under the Revolver and for working
capital purposes.
In May 1995, the Company consummated a second public offering of 4,000,000
shares. TOPA sold 689,028 shares of common stock in the second public offering
and received net proceeds of $6,387. TOPA used these proceeds to repay, in
part, the $6,600, outstanding under the subscription receivable owed to the
Company. Proceeds to the Company from this offering were $36,570, which was net
of commissions and expenses of $2,430. The net proceeds were used to repay
amounts outstanding under the Revolver, for amounts paid in connection with the
execution of Service Agreements, for capital expenditures, and for working
capital purposes.
In April 1996, the Company consummated a third public offering of
5,380,000 shares. BUMC, one of the Company's existing shareholders, also sold
600,000 shares of common stock in the third public offering and received net
proceeds of $11,460. Proceeds to the Company from this offering were $102,470,
which was net of commissions and expenses of $5,236. The net proceeds were used
to repay amounts outstanding under the Revolver, in connection with executing
Service Agreements, for capital expenditures, and for working capital purposes.
Effective May 21, 1996, the Company's Articles of Incorporation was
amended to increase the authorized shares of common stock from 50,000,000 to
150,000,000.
On June 10, 1996, the Company effected a two-for-one stock split in the
form of a 100% stock dividend to shareholders of record on May 31, 1996.
In connection with entering into Service Agreements and purchasing the
assets of Affiliated Physician Groups, the Company has committed to issue
shares of common stock at specified future dates. Common stock to be issued is
shown as a separate component in stockholders' equity.
The Company has reserved 5,106,138 shares of common stock for issuance
upon exercise of stock options. The terms of the Company's Revolver restrict
the Company's ability to declare, pay, or issue dividends or other
distributions with respect to its capital stock, except for stock dividends.
43
<PAGE> 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Proxy Statement issued in connection with the Annual Meeting of
Shareholders to be held on May 21, 1997, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(b), contains under the caption
"Election of Directors" information required by Item 10 of Form 10-K as to
directors and certain executive officers of the Company and is incorporated
herein by reference. Pursuant to General Instruction G(3), certain information
concerning the executive officers of the Company is included in Part I of this
Form 10-K under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION.
The Proxy Statement issued in connection with the Annual Meeting of
Shareholders to be held on May 21, 1997, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(b), contains under the caption
"Executive Compensation" information required by Item 11 of Form 10-K and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Proxy Statement issued in connection with the Annual Meeting of
Shareholders to be held on May 21, 1997, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(b), contains under the caption
"Security Ownership of Management and Certain Beneficial Owners" information
required by Item 12 of Form 10-K and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Proxy Statement issued in connection with the Annual Meeting of
Shareholders to be held on May 21, 1997, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(b), contains under the caption
"Certain Transactions" information required by Item 13 of Form 10-K and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements: See Item 8.
2. Financial Statement Schedules: See Item 8.
3. Exhibits: See Index to Exhibits, pages 48 through 49.
(b) During the quarter ended December 31, 1996, the Registrant filed no
reports on Form 8-K.
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PHYSICIAN RELIANCE NETWORK, INC.
Dated: March 28, 1997 By: /s/ MERRICK H. REESE, MD
--------------------------------
Merrick H. Reese, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ MERRICK H. REESE, MD
- ------------------------------------ Chairman of the Board, March 28, 1997
Merrick H. Reese President, Chief Executive
Officer (Principal Executive
Officer)
/s/ JOSEPH S. BAILES, MD
- ----------------------------------- Director March 28, 1997
Joseph S. Bailes
/s/ NANCY G. BRINKER
- ----------------------------------- Director March 28, 1997
Nancy G. Brinker
- ----------------------------------- Director March 28, 1997
Robert W. Daly
/s/ BOONE POWELL, JR.
- ----------------------------------- Director March 28, 1997
Boone Powell, Jr.
/s/ BRIAN C. CHANDLER
- ----------------------------------- Controller (Principal Accounting March 28, 1997
Brian C. Chandler Officer)
</TABLE>
45
<PAGE> 46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Physician Reliance Network, Inc.
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Physician Reliance Network, Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon
dated February 10, 1997. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the index to financial statement schedule is presented for purposes of
complying with the Securities and Exchange commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 10, 1997
46
<PAGE> 47
SCHEDULE II
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARY
RESERVES FOR UNCOMPENSATED CARE
<TABLE>
<CAPTION>
Balance at Additions Reductions, Balance at
Beginning Charged to Net of End of
of Period Income Recoveries Other Period
--------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996 $ 13,321 $ 18,370 $(11,894) $ -- (1) $ 19,797
-------- -------- -------- -------- --------
Year ended December 31, 1995 $ 6,304 $ 13,286 $ (6,606) $ 337 (1) $ 13,321
-------- -------- -------- -------- --------
Three months ended December 31, 1994 $ 5,450 $ 2,741 $ (1,887) $ -- $ 6,304
-------- -------- -------- -------- --------
Year ended September 30, 1994 $ 4,497 $ 6,946 $ (1,496) $ (4,497)(2) $ 5,450
-------- -------- -------- -------- --------
</TABLE>
(1) Represents reserves for uncompensated care related to accounts receivable
purchased from affiliated physician groups at the time of the execution of
a management service agreement.
(2) Represents reserves for uncompensated care related to the accounts
receivable retained by TOPA in connection with the Reorganization.
47
<PAGE> 48
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------------- ----------------------------------------------------------------------------------
<S> <C> <C>
3.1 -- Articles of Incorporation of Registrant. (1)
3.2 -- Bylaws of the Registrant. (2)
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Articles of
Incorporation and Bylaws defining rights of the
holders of the Common Stock of the Registrant.
4.2 -- Form of Stock Certificate for the Common Stock of the Registrant. (2)
10.1 -- Restated Security Agreement, dated as of October 1, 1993, by Texas
Oncology, P.A. in favor of Registrant. (2)
10.2 -- Amended and Restated Loan and Security Agreement among Bank One, Texas,
N.A. as administrative lender, Bank One, Texas, N.A., and NationsBank
of Texas, N.A., as lenders, and the Registrant, dated effective
December 31, 1995. (5)
10.3 -- Stockholders' Agreement, dated October 8, 1993, by and among the
Registrant, Texas Oncology, P.A., and certain investors. (2)
10.4 -- Registration Rights Agreement, dated as of October 8, 1993, by and
among the Registrant, Texas Oncology, P.A., and certain investors. (2)
10.5 -- Stockholders' Agreement, dated as of September 16, 1994, by and among
the Registrant, Texas Oncology, P.A., and Baylor University Medical
Center. (2)
10.6 -- Registration Rights Agreement, dated as of September 16, 1994, by and
among the Registrant, Texas Oncology, P.A., and Baylor University
Medical Center. (2)
10.7 -- Promissory Note of Texas Oncology, P.A., dated September 15, 1994, in
the original principal amount of $6,600,000, payable to the order of
the Registrant. (2)
10.8 -- Lease Agreement, dated as of August 1, 1994, by and between Baylor
Health Care System, as landlord, and the Registrant, as tenant. (2)
10.9 -- Lease, dated as of September 1, 1992, by and
between Mother Frances Hospital of Tyler, Texas, as
landlord, and the Registrant, as tenant.(2)
10.10 -- Office Lease Agreement, dated as of February 12, 1993, by and between
Texas Commerce Bank -- Odessa, N.A., as lessor, and the Registrant, as
Lessee. (2)
10.11 -- Arlington Medical Center Medical Office Building Lease Agreement, dated
as of December 8, 1993, by and between HCA-Arlington, Inc., as
landlord, and the Registrant as tenant. (2)
10.12 -- Sublease, dated as of January 24, 1995, by and between Eagle Snacks,
Inc., as Sublandlord, and the Registrant, as Subtenant. (3)
10.13 -- Lease Agreement, dated as of April 2, 1995, by
and between Midland County Hospital District, as
landlord, and the Registrant, as tenant.(4)
10.14 -- Office Lease, dated as of November 20, 1995, by and between
Northcreek Business Park, Ltd., as lessor, and the Registrant, as
lessee. (5)
10.15 -- First Amendment to Lease, dated as of February 29, 1996, by and between
Northcreek Business Park, Ltd., as lessor, and the Registrant,
as lessee. (5)
10.16 -- Lease Agreement, dated June 16, 1995, between Medical City Dallas
Limited, as lessor, and the Registrant, as lessee. (5)
10.17 -- First Amendment to Lease Agreement, dated November 9, 1995, by and
between Medical City Dallas Limited, as lessor, and the Registrant, as
lessee. (5)
</TABLE>
48
<PAGE> 49
<TABLE>
<S> <C>
10.18 -- Lease Agreement, dated as of June 1, 1995, by and between Galen
Hospitals of Texas, Inc., as lessor, and the Registrant, as lessee. (5)
10.19 -- Lease Agreement, dated as of June 1, 1995, by and between Galen
Hospitals of Texas, Inc., as lessor, and the Registrant, as lessee. (6)
10.20 -- Office Sublease Agreement, dated April 23, 1996, between Santa Fe
International Corporation, as Landlord, and the Registrant, as Tenant.
(6)
10.21 -- Amended and Restated Service Agreement, dated as of January 1, 1996, by
and between the Registrant and Texas Oncology, P.A. (6)
10.22 -- Amendment No. 1 to the Amended and Restated Service Agreement, dated as
of December 18, 1996, by and between the Registrant and Texas Oncology,
P.A.
10.23 -- Termination Agreement, dated as of December 31, 1996, by and between Texas Oncology
Pharmacy Services, Inc. and Texas Oncology, P.A.
EXECUTIVE COMPENSATION PLANS AND MANAGEMENT CONTRACTS
10.24 -- 1993 Stock Option Plan. (2)
10.25 -- 1994 Stock Option Plan for Outside Directors. (2)
10.26 -- Form of Employment Agreement entered into by the Registrant with Drs.
Reese and Bailes and with Messrs. Kurtz, McGinn, Sims, and Whren, and Ms. Burgess.(2)
10.27 -- Form of Stock Option Agreement entered into by the Registrant with
Drs. Reese and Bailes and Mr. Daly. (5)
10.28 -- First Amendment to the 1993 Stock Option Plan. (7)
10.29 -- Agreement, dated as of December 12, 1996, by the Registrant and Randall D. Kurtz.
11 -- Statement re net income per common equivalent share.
21 -- Subsidiaries of the Registrant. (5)
27 -- Financial Data Schedule
-----------------
(1) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996
(2) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration
No. 33-84436).
(3) Incorporated by reference to the Registrant's Transition Report
on Form 10-K for the period from October 1, 1994 through
December 31, 1994.
(4) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration
No. 33-90996).
(5) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995.
(6) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996.
(7) Incorporated by reference to the Registrant's Proxy Statement
issued in connection with its Annual Meeting of Shareholders
held on May 8, 1996, filed with the Securities and Exchange
Commission Pursuant to Rule 14a-6(b).
</TABLE>
49
<PAGE> 1
EXHIBIT 10.22
AMENDMENT NO. 1 TO THE AMENDED AND RESTATED SERVICE AGREEMENT
This Amendment No. 1 to the Amended and Restated Service Agreement is
entered into as of December 18, 1996 by and between Physician Reliance Network,
Inc., a Texas corporation ("PHYN"), and Texas Oncology, P.A., a Texas
professional association (the "Practice").
RECITALS:
WHEREAS, the Practice and PHYN are parties to an Amended and Restated
Service Agreement entered into as of January 1, 1996 (the "Service Agreement");
and
WHEREAS, the Practice and PHYN desire to amend Section 11.1 of the
Agreement;
NOW THEREFORE, in consideration of the payment of one million dollars
by PHYN to the Practice and in consideration of the mutual covenants and
agreements contained in the Service Agreement, the Practice and PHYN hereby
agree as follows:
1. Section 11.1 of the Agreement is deleted in its entirety and
replaced with the following:
"This Agreement shall expire on December 31, 2033 unless earlier
terminated pursuant to the terms hereof."
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
TEXAS ONCOLOGY, P.A. PHYSICIAN RELIANCE NETWORK, INC.
By: /s/ Charles S. White, III By: /s/ Merrick H. Reese
------------------------------- -------------------------
Title: Chair, Operating Committee Title: President
----------------------------- -----------------------
<PAGE> 1
EXHIBIT 10.23
TERMINATION AGREEMENT
This Termination Agreement is entered into effective December 31, 1996
between Texas Oncology, P.A. ("TOPA") and Texas Oncology Pharmacy Service, Inc.
("TOPS").
1. TOPA and TOPS are parties to a Service Agreement (the "Service
Agreement") dated as of October 1, 1993.
2. The original purpose of the Service Agreement is no longer
applicable to the operations of TOPS, TOPA or Physician Reliance Network,
Inc., the parent corporation of TOPS.
3. The parties hereto agree that the Service Agreement is terminated
effective December 31, 1996.
TEXAS ONCOLOGY, P.A. TEXAS ONCOLOGY PHARMACY
SERVICES, INC.
By: /s/ Merrick H. Reese By: /s/ Robert J. Whren
---------------------- -------------------------
Title: President Title: President
-------------------- -----------------------
<PAGE> 1
EXHIBIT 10.29
AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into as of this 12th day
of December, 1996, by PHYSICIAN RELIANCE NETWORK, INC. ("Employer") and RANDALL
D. KURTZ ("Employee").
IN CONSIDERATION of the payments made and to be made by Employer to or
for the benefit of Employee under this Agreement, the mutual promises and
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Employer and Employee
agree as follows:
1. Background. Employee and Employer entered into an Employment
Agreement (the "Employment Agreement") dated September 1, 1994, concerning the
employment of Employee by Employer. Employee has decided to resign as an
employee and officer of Employer and as an officer and director of each of
Employer's subsidiaries and affiliates of which Employee is an officer or
director. Employee and Employer mutually desire to set forth their agreements
regarding Employee's resignation and to settle any and all claims and causes of
action that Employee has or may have against Employer and the other Releasees
(as hereinafter defined).
2. Termination of Employment. Employee's employment with Employer
shall terminate effective as of January 3, 1997 (the "Termination Date").
Effective as of the Termination Date, Employee also resigns as Executive Vice
President, Chief Financial Officer and Treasurer of, and from all other
positions with, Employer and resigns as an officer and director of each of
Employer's subsidiaries and affiliates of which Employee is an officer or
director.
3. Consideration. Subject to the terms of this Agreement and
conditioned upon Employee's full performance of this Agreement, including
without limitation Employee's compliance with Sections 5, 6, 7 and 8,
Employer shall pay or provide Employee with the following:
3.1 Cash Payment. Employer agrees to pay Employee $357,019.00
(the "Cash Payment"), less all applicable (i) federal income tax withholdings
as determined in accordance with the Employee's W-4 form on file with the
Employer, (ii) F.I.C.A., and (iii) other withholding and employment taxes. The
Cash Payment shall be paid as follows: $287,019.00 shall be paid on or before
January 3, 1997, and $70,000.00 shall be paid on or before the earlier of (x)
January 3, 1998, or (y) a Change of Control (as defined herein). For the
purposes of this Agreement, a "Change of Control" shall be deemed to have taken
place if as the result of, or in connection with, any cash tender or exchange
offer, merger or other business combination, sale of all or substantially all
of the assets of the Company, or any combination of the foregoing transactions,
less than a majority of the combined voting power of the then-outstanding
securities of the Company or any successor corporation or entity entitled to
vote generally in the election of the directors of the Company or such other
corporation or entity after such transaction are held in the aggregate by the
holders of the Company's securities entitled to vote generally in the election
of directors of the Company immediately prior to such transaction.
3.2 Insurance. Employee and Employer acknowledge that under
Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA"), Employee may elect to buy continued coverage under Employer's group
health plan for a period of up to eighteen (18) months after termination of
employment. Employer shall pay the premiums for Employee's continued health
plan benefits under COBRA (the "COBRA Payments") for the period commencing on
the day after the Termination Date and continuing until the earlier of (i)
January 3, 1998, or (ii) if Employee is employed by another employer (the "New
Employer"), the first date Employee is eligible to be covered by the medical
plan of the New Employer.
3.3 Purchase of Furniture. Employer shall purchase those
items of furniture owned by Employee and listed on Schedule 3.3 attached hereto
for the purchase price of $3,000.00 (the "Purchase Price"). The Purchase Price
shall be paid on or before January 3, 1997, by Employer's check.
3.4 Full Payment. Employee agrees that the Cash Payment and
the other amounts and benefits to be provided by Employer to Employee under
this Agreement constitute the full and complete consideration to which Employee
is entitled in exchange for entering into this Agreement and that all
compensation or other payments and benefits to which Employee is or will be
entitled as an employee of Employer have been paid in full, except for the
<PAGE> 2
payment of salary and benefits for the pay period ending January 3, 1997, and
earned vacation through January 3, 1997, which will be paid in accordance with
Employer's regular payroll schedule.
4. Indemnification. TO THE FULLEST EXTENT ALLOWED BY LAW, EMPLOYER
WILL INDEMNIFY AND HOLD HARMLESS EMPLOYEE AGAINST ANY AND ALL ACTIONS, SUITS,
PROCEEDINGS, CLAIMS, DEMANDS, ASSESSMENTS, LIABILITIES, LOSSES, DAMAGES,
JUDGMENTS, PENALTIES (INCLUDING EXCISE AND SIMILAR TAXES), FINES, SETTLEMENTS,
DEFICIENCIES, COSTS AND EXPENSES (INCLUDING WITHOUT LIMITATION COURT COSTS AND
THE REASONABLE FEES AND EXPENSES OF COUNSEL), WHETHER KNOWN OR UNKNOWN, ARISING
OUT OF OR RESULTING FROM ANY ACTIONS TAKEN BY EMPLOYEE IN BEHALF OF EMPLOYER OR
ANY SUBSIDIARY OR AFFILIATE OF EMPLOYER OR BY VIRTUE OF BEING AN OFFICER OF
EMPLOYER OR AN OFFICER OR DIRECTOR OF ANY SUBSIDIARY OR AFFILIATE OF EMPLOYER.
5. Waiver and Release.
5.1 EMPLOYEE HEREBY IRREVOCABLY AND UNCONDITIONALLY RELEASES
EMPLOYER AND ANY AND ALL OF ITS SUBSIDIARIES, AFFILIATED COMPANIES AND
SUCCESSOR COMPANIES, AND THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND OTHER
REPRESENTATIVES (THE "RELEASEES"), FROM ANY AND ALL CLAIMS AND CAUSES OF
ACTION, KNOWN OR UNKNOWN, EXISTING ON THE TERMINATION DATE. Without limiting
the foregoing, this full waiver and release includes any claim of contractual
restriction on the right of employer to terminate employee's employment,
wrongful discharge, retaliatory discharge, and all rights under federal, state
or local law prohibiting race, sex, age, religion, national origin or other
forms of discrimination, including, but not limited to, Title VII of the Civil
Rights Act of 1964, as amended, the National Labor Relations Act, the Age
Discrimination in Employment Act, the Older Workers Benefit Protection Act, the
Americans with Disabilities Act, the Equal Pay Act, the Occupational Safety and
Health Act, the Family Leave Act, the Workers Adjustment and Retraining
Notification Act, the Fair Labor Standards Act, the Employee Retirement Income
Security Act, the Texas Commission of Human Rights Act, the Texas Worker
Compensation Law, and similar anti-discrimination statutes and provisions. If
Employer files any lawsuit against Employee for any claim arising out of
Employee's employment with Employer prior to the date of this Agreement,
Employee shall have the right to pursue any counterclaims against the Employer
notwithstanding the provisions of this Section 5, provided, however, that
Employee repays Employer the Cash Payment and the COBRA Payments prior to
filing any such counterclaims and Employee may assert all available defenses.
5.2 Employee agrees that Employee shall forever refrain from
initiating, prosecuting, maintaining, or pressing any action, suit or claim in
any jurisdiction against Employer based on the termination of Employee's
employment with Employer.
5.3 Employee acknowledges that there is a risk that
subsequent to the execution of this Agreement, Employee may discover, incur or
suffer from claims which were unknown or unanticipated at the time this
Agreement is executed, including without limitation unknown or unanticipated
claims which arose from, are based upon, or are related to Employee's
employment with Employer, which if known by Employee on the date this Agreement
is being executed, may have materially affected Employee's decision to execute
this Agreement. Employee acknowledges that Employee is assuming the risk of
such unknown and unanticipated claims, and agrees that this Agreement applies
to all such claims.
5.4 This Agreement is not intended to be a waiver of any
rights that Employee may have to (i) non-forfeitable benefits under any of
Employer's employee benefit plans which by their terms specifically provide for
non-forfeitable benefits; (ii) convert group benefits under any of Employer's
group benefit plans to individual coverage, to the extent that such plans allow
such conversion; or (iii) continue coverage under any of Employer's medical
plans as provided by the Consolidated Omnibus Budget Reconciliation Act of
1985.
6. Confidentiality.
6.1 Confidential Information. Employee acknowledges that
during the term of Employee's employment with Employer, Employee had access to
and became familiar with various trade secrets and confidential information,
including without limitation Employer's products, improvements, designs or
styles, processes, methods of marketing or distribution, systems, procedures,
plans, proposals, policies, financial information, compilations of
<PAGE> 3
information, records, and manner of doing business, which are owned by Employer
and which are regularly used in the operation of the business of Employer
(the "Confidential Information"). For purposes of this Agreement, "Confidential
Information" shall not include (i) information which becomes generally
available to the public other than through disclosure by Employee or (ii)
information that Employee possessed prior to employment with Employer. Employee
shall not, directly or indirectly, disclose or make known to any person, firm
or corporation or use any Confidential Information at any time after the
Termination Date except as such disclosure may be required by law or court
order. In the event disclosure is required by law or court order, Employee
shall notify Employer as soon as possible of such pending disclosure. All
files, records, documents, data, materials, equipment and similar items
relating to the business of Employer, whether prepared by the Employee or
otherwise coming into Employee's possession, shall remain the exclusive
property of Employer and shall not be removed from the premises of Employer
without the prior written consent of Employer. Any such files, records,
documents, data, materials or equipment and similar items, and any and all
copies of such property which have been removed from the premises of Employer
shall be returned by Employee to the Employer on the Termination Date.
6.2 Confidentiality of this Agreement. Employer and Employee
agree to hold confidential and not to disclose, make public or to communicate
orally or in writing to any person or entity, directly or indirectly, the terms
of this Agreement or any matter set forth herein, except (a) as may be
compelled by a court order, (b) as may be necessary to enforce the terms of
this Agreement, (c) to a party's legal, accounting or financial advisors, or
(d) as may be required by law.
7. Noncompetition.
7.1 For a period of three (3) years following the Termination
Date, Employee will not directly or indirectly, without the prior written
approval of Employer's Chief Executive Officer or General Counsel, (i) own,
manage, operate, control or participate in the ownership, management, operation
or control of, or be connected as an officer, employee, consultant, partner,
director or otherwise with, or have any financial interest in, or aid or assist
anyone else in the conduct of, any Business (as defined herein), or (ii) either
as an officer, employee, consultant, partner, director or otherwise, provide,
manage, or operate any Services (as defined herein), or control or participate
in the provision of any Services, or aid or assist anyone else (whether or not
a Business) in providing any Services; provided, however, that ownership of
five percent (5%) or less of the voting stock of any publicly held corporation
shall not constitute a violation of this section. For purposes of this
Agreement, "Business" shall mean any entity or business that provides any
Services as a substantial part of its business, and "Services" shall mean
outpatient oncology services or management services to an entity or business
that provides outpatient oncology services within the United States. Employee's
obligations under this Section 7.1 shall terminate after January 1, 1998, upon
a Change of Control.
7.2 Employee acknowledges that the time and geographical
restrictions set forth in this Section 7 are reasonable in scope and necessary
for the protection of the business and goodwill of Employer. Employee agrees
that should any portion of the covenants in this Section 7 be unenforceable
because of the scope thereof or the period covered thereby or otherwise, the
covenants shall be deemed to be reduced and limited to enable them to be
enforced to the extent permissible under the laws and public policies applied
in the jurisdiction for which enforcement is sought. In the event of a breach
of any of the covenants contained in this Section 7, it is understood that the
damages will be difficult to ascertain and the Corporation may petition a court
of law or equity for injunctive relief in addition to any other relief which
Employer may have under the law, including but not limited to reasonable
attorneys' fees.
7.3 Employee acknowledges that the provisions of this Section
7 are reasonable and necessary to protect the confidential information of
Employer and that Employee's relationship with another business that provides
outpatient oncology services or that provides management services to an entity
that provides outpatient oncology services would inevitably result in the use
or disclosure of Employer's confidential information for the benefit of that
other entity in competition with Employer. Employee also acknowledges that due
to Employee's educational background and experiences, the restrictive covenants
contained in this Section 7 will not cause Employee undue hardship and will not
unreasonably limit Employee's ability to earn a livelihood.
7.4 Nothing in this Agreement shall affect the provisions of
the Employment Agreement regarding confidential information and
non-competition, including without limitation Sections 8 and 9 of the
Employment Agreement. Employee reaffirms the provisions of the Employment
Agreement regarding confidential information and non-competition, including
without limitation Sections 8 and 9 of the Employment Agreement, and agrees
that such provisions continue to be binding upon Employee.
<PAGE> 4
8. No Disparagement.
8.1 Employee shall not make any negative, derogatory,
defamatory or disparaging comments, either in writing or verbally, about
Employer or any of its employees, officers or directors to anyone, including
without limitation the employees, officers, directors or members of the
Employer.
8.2 Employer's Chief Executive Officer, Chief Operating
Officer, General Counsel or Board of Directors shall not make any negative,
derogatory, defamatory or disparaging comments, either in writing or verbally,
about Employee to anyone.
9. Consideration. Employee agrees that the Cash Payment and the
COBRA Payments are reasonable and sufficient consideration for all of
Employee's covenants, obligations, waivers and releases under this Agreement.
10. Severability. If any term or provision of this Agreement
is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the provisions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired, or
invalidated.
11. Captions. The various caption headings in this Agreement are
inserted for convenience only and shall not affect the meaning or the
interpretation of this Agreement or any section or provision hereof.
12. Attorney's Fees and Costs. If any action, at law or in equity, is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to recover reasonable attorney's fees, costs and
necessary disbursements from the losing party in addition to any other relief
to which the prevailing party may be entitled.
13. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, AND THIS AGREEMENT SHALL BE
DEEMED TO BE IN ALL THINGS PERFORMABLE IN DALLAS, DALLAS COUNTY, TEXAS. TO THE
EXTENT ALLOWED BY LAW, EMPLOYEE AND EMPLOYER AGREE THAT ANY ACTION OR
PROCEEDING TO ENFORCE OR INTERPRET THIS AGREEMENT SHALL BE BROUGHT AND
MAINTAINED IN A COURT OF COMPETENT JURISDICTION SITTING IN DALLAS COUNTY,
TEXAS.
14. Entire Agreement. This Agreement supersedes the Employment
Agreement and any and all other agreements, either oral or in writing, between
the parties hereto with respect to the subject matter hereof and contains all
of the covenants and agreements between the parties with respect to the subject
matter hereof. This Agreement does not, however, supersede or affect (i) the
outstanding stock option agreements between Employer and Employee, (ii) the
outstanding stock option agreements between Texas Oncology, P.A. and Employee,
or (iii) the Consulting Agreement executed between Employer and Employee with
respect to consulting services to be rendered by Employee after the Termination
Date.
15. Multiple Copies. While this Agreement may be executed in multiple
counterparts, each fully executed copy hereof shall, for all purposes, be
deemed to be the original, but all of such executed counterparts shall be
deemed to be but one agreement.
16. Benefit of Agreement. This Agreement shall be binding upon and
inure to the benefit of Employee and Employee's heirs and executors. Employee
shall not transfer or assign any or all of the Employee's rights, benefits or
obligations hereunder.
17. Modification and Waiver. The terms of this Agreement shall not be
modified, amended or changed and the necessity for compliance with any term,
provision, condition or requirement of this Agreement shall not be waived
unless consented to in writing and signed by Employer and Employee.
18. ADEA. Notwithstanding any other provision of this Agreement,
Employee specifically acknowledges and understands that Employee is, by signing
this Agreement, waiving any and all rights or claims Employee may have arising
out of Employee's employment with Employer, including any claims under the Age
Discrimination in Employment Act ("ADEA"), 29 USC ss.612, et seq., and Employee
and Employer agree as follows:
<PAGE> 5
(a) This Agreement is written in plain English.
(b) This Agreement does not waive Employee's
ADEA rights that arise after the date on which Employee executes this Agreement.
(c) Employee executes this Agreement in
exchange for consideration or compensation to which Employee is not already
entitled.
(d) Employee has been given twenty-one (21)
days to consider the terms of this Agreement before signing it.
(e) Employee is advised to discuss this
Agreement with Employee's lawyer before signing this Agreement.
(f) Employee will have seven (7) days after
signing this Agreement to revoke this Agreement. This Agreement will not
become effective or enforceable against Employee or Employer until the
seven-day revocation period has expired.
IN WITNESS OF THIS AGREEMENT Employee and Employer have executed this
Agreement as of the date and year first above written and Employee's signature
is witnessed by the individual who has executed as a witness on the same date.
EMPLOYEE:
Date: ____________________ _______________________________
Name:__________________________
Address:________________________
________________________
________________________
EMPLOYER:
PHYSICIAN RELIANCE NETWORK, INC.
Date: ____________________ By:_____________________________
Name:________________________
Title:_________________________
<PAGE> 6
Schedule 3.3
LIST OF FURNITURE
Quantity Description
-------- -----------
1 Desk
1 Desk Chair
2 Side chairs
1 Table
4 Table Chairs
1 Book case
1 Two drawer lateral file cabinet
1 Credenza
All items listed above are currently located in Employee's office.
<PAGE> 1
EXHIBIT 11
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NET INCOME PER COMMON SHARES OUTSTANDING
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------- ------------ ------------
1994 1994 1995 1996
------------- ------------ -------- --------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 20,334 31,071 40,452 46,642
Incremental shares related to
assumed exercise of stock options 268 330 620 983
-------- -------- -------- --------
Weighted average common and common
equivalent shares - primary 20,602 31,401 41,072 47,625
Incremental shares related to
assumed conversion of redeemable preferred stock 8,156 -- -- --
Incremental shares related to
assumed conversion of common stock subscribed 408 655 -- --
-------- -------- -------- --------
Weighted average common and common
equivalent shares - fulled diluted 29,166 32,056 41,072 47,625
======== ======== ======== ========
Income before extraordinary item $ 2,363 $ 1,415 $ 14,115 $ 20,496
Extraordinary item (302) -- -- --
-------- -------- -------- --------
Net income $ 2,061 $ 1,415 $ 14,115 $ 20,496
======== ======== ======== ========
Net income per share (primary and fully diluted)
net income before extraordinary item $ 0.08 $ 0.04 $ 0.34 $ 0.43
Extraordinary item (0.01) -- -- --
-------- -------- -------- --------
Net income per common share $ 0.07 $ 0.04 $ 0.34 $ 0.43
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,679
<SECURITIES> 0
<RECEIVABLES> 114,396
<ALLOWANCES> 19,797
<INVENTORY> 4,481
<CURRENT-ASSETS> 118,817
<PP&E> 171,064
<DEPRECIATION> 29,394
<TOTAL-ASSETS> 355,341
<CURRENT-LIABILITIES> 40,048
<BONDS> 0
0
0
<COMMON> 476
<OTHER-SE> 294,300
<TOTAL-LIABILITY-AND-EQUITY> 355,341
<SALES> 224,493
<TOTAL-REVENUES> 238,319
<CGS> 0
<TOTAL-COSTS> 202,613
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,939
<INCOME-PRETAX> 33,767
<INCOME-TAX> 13,271
<INCOME-CONTINUING> 20,496
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,496
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
</TABLE>
